How Does Passive Income Work?

Quick Review Of Passive Income

When I invest in stocks or mutual funds these companies use my money to invest it back into their growth. They sometimes will pay me dividends in order to entice me to continue investing with them. Or they know that more people will buy their stocks which will drive the price of each stock up – another way for my money to grow.

Something similar happens with bonds which is basically money that you lend to an entity. A bond fund has a yield, think of it as an interest on the money you lend them.

So, I invest my money in stocks and bonds and usually it grows over the long-term or even short-term. As for how much, nobody knows. But, based on how the market has been for however-many-years it’s likely to allow me to profit somewhere in the 3-5% range (let’s say 3.5%) in the long-term after fees and taxes.

The quick math is that for every $100,000 that I invest I can expect to earn $3,500 every year on average. If my expenses are $20,000 per year then I would need ($20,000/0.035)=$571,428 invested. And of course if my expenses are higher, let’s say $80,000 per year then I would need nearly $2.3 million invested.

There Is No Magic

Some think these numbers to be too good to be true. Well, you really aren’t getting that great of a deal but it’s one of the best things you can do with your money in terms of “passive” income. Of course, this is as of 2015. In a few years everything will be different and there will be other ways or better ways of making passive income.

You can make passive income many other ways but this post is focusing on investing your money in index funds which is all the rage right now.

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