How much money does it take to live on passive income

Why count it

Passive income is money that a person receives, even if he does nothing. Or at least it spends a minimum of effort.

The idea of being able not to work but not starving to death is good. First, it gives freedom. You can choose what to do and not tolerate a tyrant boss because of the salary slightly higher in the market. Secondly, it brings security. In the case of, for example, health problems, it will be possible to calmly be treated and not worry about well-being. Thirdly, passive income allows you to take care of a pension when you simply won't be able to work.

Therefore, it makes sense to work hard for several years, accumulate capital for investment, and then reap the benefits. But it all comes down to how much money you need to live on passive income.

People often have little idea of what amounts are in question. Although setting a goal is the first step towards realizing this dream. A clear financial goal will help to calculate everything at least approximately and develop a strategy for savings and investments.

There cannot be a universal amount that will suit everyone. Everyone has different requests. Therefore, we propose to see how much money you need to invest in the simplest financial instruments in order to passively receive 50 thousand rubles a month. This is slightly more than the average Russian salary after taxes.

How much you need to invest to live on passive income

To bank deposit

Contributions are different. Several options are suitable for our purpose:

Savings account. From it, you can freely withdraw money whenever you want and report too. But we are primarily interested in the option to take monthly interest, which is also charged every month.
Deposit with the ability to withdraw interest on a monthly basis. The money itself cannot be touched at the same time.

The interest rate on a deposit is usually slightly higher than for savings accounts. However, the latter can have as much money as you like. And the deposit needs to be monitored. If its deadline has expired, the bank can extend it on unfavorable terms.

The disadvantage of bank deposits is that the interest rate on them is generally not very high. If we take the period from January 2014 to the present, on average it will be 7.09% for deposits for a period from one to three years. This is quite a lot compared to the current rates, but it would be unfair to count only according to the latest data.

To receive 50 thousand a month, or 600 thousand a year, at a rate of 7.09%, you need to put 9.7 million rubles into a bank account. On average, the income will be 57 thousand per month, or 687 730 rubles per year.

688 thousand is slightly more than the amount we agreed on. But you need to take into account the tax on income from deposits. It is paid on the amount of interest that exceeds the established threshold - the key rate in effect at the beginning of the year, multiplied by a million. If we take the current figure of the key rate of 6, 75%, it turns out that only 67, 5 thousand are exempt from tax. The rest of the income will have to give 13% to the state. It will be 89 396 rubles, after deducting which there will be just 607 100 rubles per year.

Into stocks and bonds

You can make money on stocks in two ways: buy them at a lower price and sell them at a higher price, or receive dividends. The second option is more suitable for us, because after the arrival of payments, the shares still remain property and do not deprive us of income in the future. Lifehacker has detailed material about dividend shares, so now let's go straight to the calculations.

Dividends are most often paid once a year. At the same time, they are taxed at 13%, but already on the entire amount. So it should be about 690 thousand per year.

How much you have to invest for this will largely depend on the dividend yield of the shares, which can be calculated using a simple formula: share price / dividend per share × 100%. The higher the profitability, the less the invested capital can be.

One could use the formula and calculate the dividend yield for different shares, but this has already been done by the Moscow Exchange. In the organization's data, there is a profitability from 2018 to 2020. Let's calculate the average over three years for some securities and determine the amount.

Alrosa: dividend yield (DD) - 10, 59%. To get 690 thousand a year, you need to invest 6.5 million.
Gazprom: DD - 8.3%. It will take 8.3 million.
Sberbank, preferred shares: DD - 8.96%. You need to invest 7, 7 million.

Naturally, these calculations are very rough. First, the dividend yield may differ from year to year. Second, sometimes a company chooses not to pay dividends at all. Third, it is generally unwise to buy shares in only one organization. Better to bet on at least a few. Then, with fluctuations in the amount of dividends, their total amount will remain approximately the same. You can also consider dividend ETFs - special funds where a portfolio of stocks has already been collected for you. There is also a separate detailed material about them.

Nevertheless, you can at least decide on the order of the amounts that you need to invest in order to receive 50 thousand per month. In addition to taxes, it is worth taking into account your material relations with the broker - how much and for what you pay him, and similar related expenses, if you have any.

A similar principle is used to calculate income from bonds. By investing in them, you lend to the state, municipality, company, and in return you receive interest for it. If we are talking about passive income, consider the easiest way to invest money in this tool. You are buying a bond and not trying to sell it at a higher price. You just get a coupon income in the form of interest at a constant rate and wait for its maturity in order to return the denomination, that is, the invested funds.

Bond settlement will be even more flexible because it depends on many factors like promised coupon yield, transaction fees, and so on. But using the example of stocks, it is clear how to calculate the approximate amount of investment specifically for you (spoiler: we are talking about the same impressive numbers). Data on bonds can also be obtained from the Moscow Exchange.

In real estate

Here it is immediately necessary to clarify that the passivity of income when investing in real estate is rather dubious and depends on many factors. For example, renting out apartments definitely requires cleaning efforts, changing bed linen and towels, moving in and out of guests. Doing it yourself - you waste time and effort. You transfer this work to special people - you lose in profit.

Therefore, we will consider the easiest way to generate income - renting out residential premises for a long-term lease. Obviously, the calculations here will be non-universal. For example, renting a house in Moscow is extremely expensive. But according to the analysts of the World of Apartments, the average return on renting one-room apartments and studios in the capital is one of the lowest - 5.29%. Because the price of apartments is very high, and the cost of rent is not keeping up with them.

But if you do not go into analytics, everything is much easier. It is enough to understand how much apartments are rented in your city and how many are needed to get 50 thousand. For example, the average rental price in St. Petersburg is 23.9 thousand. The commissioning of two objects gives a total of almost 50 thousand, but this is not enough. It is also necessary to take into account the rent (about 3-4 thousand in summer, 5-6 in winter), a tax of 13%, depreciation of the contents of housing. If something breaks down in a rented apartment due to wear and tear, it is the landlord who should fix or change it. As a result, it turns out that three apartments are just right.

According to the portal RealtyMag, a single room in St. Petersburg costs an average of 5, 1 million. That is, to receive 50 thousand a month, you need to spend 15 million plus the cost of repairs. Three apartments in the secondary housing will already cost $ 19.5 million - plus finishing. This is, of course, approximately.

In a city with cheaper real estate, the costs will be lower. But more apartments will also be needed. It is also worth considering: if an investment apartment is bought on a mortgage, it will not start to bring passive income right away.

What to remember

To receive at least the average Russian salary, you need quite impressive savings. For a comfortable life, you will have to collect even more. Therefore, the stories “he won 10 million in the lottery and will now be chic all his life” are from the category of myths, not reality.
You can get more by investing less. To do this, you need to choose instruments with higher profitability, but still with moderate risks. Or to accept that the income will not be so passive, you will have to work extra.
You need to calculate all the risks and costs over a long distance. This will likely increase the amount of capital required.
Under average circumstances, it will take a long time to work on potential income. We are talking about large amounts. But this is not impossible. If you think carefully about the strategy, it is quite possible to achieve your financial goal.