Unless you have millions, of course. Then the returns still matter, but not so much, you can live quite well on what your millions make on a 3% savings account. I was checking my net worth the other day, and realized my investments give me a monthly return just over 1%. That is the almost certain part, like rental income. Having three different tenants, and one of the nicest flatshares in a UK college/university town, I am fairly confident my rooms will have a high occupancy rate. Over four years of ownership, I have had one empty room for one week, all the other tenants moved in the day after the previous left. So I consider this fairly stable passive income, if real estate can be considered passive. I do not include returns from riskier investments in that 1%, as those are never guaranteed until they are in your bank account.
How much do you need?
I do not have a budget, so I spend what I need to spend each month, but life is cheap in Guatemala so that is rarely more than $700 per month, handyman included, since my little house is fully paid for.
Add to that a month in Europe every year at $2,500, i.e. an additional $2,100 (I still pay the handyman and a few bills while away) to the yearly budget, and another $1,500 trip somewhere else, you get to $1,000 per month. This is for basic living expenses and leisure, not for investing or savings, which is why I am targeting an income of $5,000 or more. At the moment, I have 5 full time staff working on my 90 acre land development plus some extras here and there, have put more than $20,000 in house repairs and construction since last October, bought a car, a boat, etc.
Also, my goal is to not have to go back to a cubicle, so $1,000 may do the trick today, but I may need $2,000 tomorrow, or see an investment go wrong and some sources of income dry up. Better safe than sorry, even more so considering I do not have an emergency fund.
You may need more or less, the important thing is defining how much money you need in the bank to sustain your lifestyle.
How much capital do you need?
At the 4% safe rate of withdrawal, I would need $300,000 to generate a $12,000 income per year. Or $1.5M to generate $5,000 per month. Building a nest egg that will allow you to maintain your lifestyle at 4% is not easy for everyone. According to Census.gov, the median net worth in the US is $68,800. It goes up to $240,800 for people with a graduate degree, and as low as $972 for a female householder under 35. With a $68,800 net worth, I would need an annual return of 17.4% to sustain my $1,000/month lifestyle. At 4%, I would only have $230 to live every month. You can see that the rate of return makes a big difference on the overall capital you will need to live off your wealth.
Take my cattle for example. It brought me a 38% return per year while it lasted. That was an exceptional investment, and it is unfortunately over. But if I had a way to keep the cattle forever, I would need to invest only $31,600 to cover my $1,000/month expenses.
At the 1% return I am currently getting, $100,000 would be enough to be financially independent. I know I am omitting inflation but I am just trying to prove a point. $100,000 is a pretty low number, and part of that would be my house, which is not bringing any income, although if you own a nice little $80,000 house in the Midwest, that number could be $150-$200K. Still far from the million and then some that people consider to be their magic retirement number.
$1,000,000 in the bank will never give you 1% per month. A “high interest” savings account may give you 2 or 3% annually at the moment which is barely enough to keep up with inflation while generating $1,000/month in passive income.
Now I hear you say “Guatemala is a cheap country, you were able to buy a house cash, and you get high returns by taking high risks”. True. So I have an all American, real life example for you. Paula over at Afford Anything bought a $21,000 3 bedroom foreclosure, brought its price up to $30K with repairs and rented it for $900/month. Her return after taxes, maintenance and so on is around 18% per year. A couple more houses at the same price mean you invest $90K and get $16,200 per year in rental income. After two years, if you saved that income, you can buy another house. And so on.
You can do it too
Generating more than market rate is possible for most people with a little cash who are willing to take risks. Paula’s tenants can disappear overnight, or stop paying rent for a few months and leave the place in dire need of repairs, eating up the profit. Stock plummets, companies go bankrupt, inflation gets in the way.
But with several sources of income, and a balanced portfolio that includes both risky investments and a few safe ones, you may realize that financial independence isn’t as far away as you originally thought.
Have you ever calculated your rate of return over your net worth? What do you do to get the best returns possible?