Over the weekend I had an interesting talk with a family friend regarding this blog and some of the personal finance and investing topics posted here. After a long discussion and based on his experiences I started looking at some of my financial goals a bit differently. This resulted in a new personal finance goal, which was to have $300 of monthly passive income by the end of this year [Update 2012 - Met and far exceeded this goal!]. So why this goal and not stick to a more standard goal like reduce debt by $X dollars or increase investment portfolio to $50,000. Well because I believe the passive income goal supersedes these goals. This does not mean that I don’t have a budget or an investment plan; it’s just that there is little point in budgeting and investing activities if I didn’t have a target as to what the final result of all this money management would have for me. In fact setting a passive income goal means that I can work backwards to know what my budget and investment targets should be.
Wikipedia defines passive income as “Income that is received on a regular basis, with little effort required to maintain it”. As I see it, having a passive income goal is the first step towards quantifying my road to financial freedom. Off course over the years my passive income should hopefully increase to the point where it will replace most, if not all of my salaried income meaning that I will then be financially free. What’s better is that if I can get my passive income to replace my regular income before I retire, the payouts from my 401K and other retirement accounts will be an added bonus! What a great financial situation that would be.
So how will I reach this target?
I classify passive income as anything that I earn on a regular (averaged) basis which is above and beyond my working salary. This includes dividend (investing) income, interest income from savings accounts and even side income from this blog. For most people investing and interest income will be the key sources of passive income. I am fortunate that my financial position is one where I have little debt and so can really focus on my passive income goal. Here’s my current monthly passive income status ($165 p/month) and my year end target ($300 per month) broken down by the various income streams.
- Interest income from online high yield saving accounts (HSBC, ING, and Vanguard Money Market funds) – Current: $120 p/month. Year end target: $170 p/month.
- Dividend Income from funds and stocks in my portfolio – Current: $40 p/month. Year end target: $80 p/month.
- Blogging income (unlike the other income streams, this does take some work. Though I enjoy doing it!) – Current: $5 p/month. Year end target: $50 p/month.
I will update my progress every few months and I urge you to consider having a passive income goal – even if you have debt. Not only is it a great goal to strive for, it provides a real way to measure your path to financial freedom, which is the end goal after all.