How to build your passive income lifestyle starting today

How to build your passive income lifestyle, beginning today

The passive income lifestyle is a lifestyle where your passive income, be it passive rental income, passive dividend income, passive business income; is more than your living expenses.

It is a very, very nice place to be in, and not only does every passive income feels so nice, it also works to lifts up so much of my pressure. Frankly, there are a lot of ways that can lead you to the passive income lifestyle (so many investment vehicles, types, opportunities), but I dont want to create more work or complexities for myself.

To me, it has to be “true” passive and simple to maintain, so I simplified the basic passive income lifestyle concept to be boring but systematic:

  1. have a steady day job
  2. save as much as possible
  3. invest aggressively into dividend stocks that pay you at least 7.5% per year (ideally 10% and above) consistently
  4. reinvest majority of dividends
  5. until your portfolio’s yearly dividend passive income is same or more than your yearly living expenses.

That’s it.

The 3 biggest factors that will impact your passive income portfolio

They are:

  1. how much you can invest regularly (this depends on how much you earn and spend)
  2. how much is the rate of return of your passive income (ideally 10% per year but 7.5% is decent)
  3. lastly, time

Time plays the most powerful compounding effect. Albert Einstein quipped, saying that compound interest is the 8th wonder of the world, and I agree.

Compound interest, simplified

Compound interest is basically how your money grow with interest return + time.

Let me show you a basic example: say you can invest $10,000 a year ($833.33 a month) into a dividend stock that returns you 10% per annum; and you reinvest every dividend return.

  • Year 1: Invest $10,000 + 10% = $11,000 end of year
  • Year 2: Invest $10,000 + $11,000 from previous year + 10% = $23,100
  • Year 3: Invest $10,000 + $23,100 from previous year + 10% = $36,410
  • Year 4: Invest $10,000 + $36,410 from previous year + 10% = $51,051
  • Year 10: $159,310.50
  • Year 15: $317,597.73
  • Year 25: $983,077.21
  • Year 50: $11,634,429.65

Instead of plain saving $10,000 x 50 years = $500,000; you can get a much bigger amount with compounding interest.

Start your basic passive income lifestyle today

  1. Save as much as you can
  2. Start investing into dividend stocks that gives at least 7.5% per year
  3. Continue investing and reinvesting the dividends

It takes time for compounding effect to work its magic, and the more time you have, the more it’d work wondrously in your favor…but conversely, the less time you have, the more obvious the shortfall. Eg a person who has 40 years to invest has a lot more time-based benefits compared to someone who only has 10, and that’s why because I dont have high earning capacity as high income professions such as doctors, I knew I needed to start a business to level up.

If you want to level up to earn more, retire faster

Then you gotta earn more.

For most people who have time on their side and have a good chunk to invest monthly, they can take their time to invest regularly, ie dollar-cost-average (DCA) into stable dividend stocks. It is a good way. I take this approach one level up with my businesses which serves to help me accelerate my earning rate (it’s fun and complex too ehehe)

Quick money side hustles

These include the low-hanging fruits of app-based works such as

  • driving for Uber, Lyft, Grab
  • sending items with DoorDash or similar
  • pet walking / baby sitting
  • etc

These are the kind of work that can help you earn an extra $50-100+ a day on your schedule, as part of your routine.

Learn high income skills

High income skills are skills and work that are higher value, such as

  • property agents / realtors
  • insurance agents
  • copywriters / direct sales
  • trade skills such as plumbing, electrical

and can typically earn you $100k/year.

Scale up businesses

Scaling up a business means to grow, hire and delegate, but before we go there, let me first say that it’s not always a necessity. It’s wayyyy more complex and difficult, but of course, has the most potential. Not everyone is keen or hungry to scale up businesses, and that is fine.

An example of scaling up a physical business is if you’re a realtor, you can consider recruiting a team of 5-10+ sales agents under your belt, where you then train them and lead them to grow their own businesses under your business. The upside is that you can multiply your income exponentially…when done right.

When done wrong, it can mean you working 24/7, tired and burnt out. Or lose money.

Normally, I recommend people to either do something low-hanging such as the quick small wins type or building a $100k+ per year freelancing business, because it’s less complex. If you want to do something that can scale, you can consider starting a blogging business where it can cost a few hundred bucks a year on the side.

Blogging is a publishing business where it can become a powerful passive income business with scale, but it does take a lot of time (at least a minimum of 2 years+) for it to take traction, build followers etc. The goal is to build a good enough following who likes what you write and do, and then monetize by display ads and creating products that help your followers.

I use this platform to learn how to build my profitable blogging business.

Invest the profits from businesses and side gigs into dividend stocks

The profits I use to invest into dividend stocks (mainly as core) as well as some into high-risk-high-growth investments such as crypto. Profits from high-risk-high-growth investments are taken out to decrease risk and invest into more dividend stocks and pay for primary home.

Rinse and repeat.

This is how much you need to live on dividends

Every stable dividend-paying stock = fruit-bearing tree

I see every dividend stock I buy and own as a fruit tree, and every fruit tree will produce a dividend fruit for me; and my overall goal is to have a big enough orchard of dividend-paying dividend stocks to live off the dividends on.

If you’re like me, there are 3 key items to consider to know how much you need to live on your dividends and retire early or do something you like, be it paying off debts of your family, retiring your wonderful wife, or marry and even having more kids.

3 important factors that affect how much you need invested to retire on dividend stocks

  1. how much do you need a month to spend on
  2. how much you can invest a month
  3. how much returns on investment you can get from your dividend stocks

They all affect each other, so it’s best to see them as a combined trinity.

Example if you spend a lot, you need to invest more every month, for a long time with high returns. Conversely, if you spend less, you can retire much faster, take less risk too.

An example, say you spend $3K a month, and take home $4.5K a month. That’d mean that

  1. Your yearly expenses = $3K x 12 months = $36K/year
  2. You can invest $1.5K/month

How much do you need to retire?

Using the same example of monthly spend of $3K/month, that’d mean you need $36K/year.

This means is that your investments eventually need to at least pay you $36K/year.

Unfortunately, because every dividend-paying stock is different, it makes things a bit more complex AND make you second guess yourself waaaaaaaay more than you should (this is the dilemma of only 1 option versus choosing from 1000+ options). The more you have to choose from, the harder it is.

Low yearly dividends = need more capital

For now, let’s assume you find a dividend stock that pays 3% per year, you’d need $36K/3% = $1.2M, which is A LOT. No one has a spare $1.2M lying around to invest.

Even if you invest $1.5K/month every month, and reinvest every single 3% dividend, it’d still take you 36.5 years to reach $1.2M!

This is very painful…so how? Does that mean we give up on our desire to retire on dividend passive income from dividend stocks? Of course not!

Higher dividend yields = less capital needed

The next and better step would be to find better, higher dividend paying stocks.

Let’s again, use back the same example of needing $36K/year to retire. If you find a dividend stock that pays 10% per year, that’d mean you “just” need $36K per year / 10% = $360K.

$360K is 30% of $1.2M.

That’s muuuuuuuuuuch easier to achieve. If you invest $1.5K/month PLUS reinvest the dividends it’d take you about 11 years to achieve your goals of amassing $360K.

For a 30 year old dude, that’s like retiring at 66.5 years old versus retiring at 41.

I will definitely choose to retire at 41 compared to retiring at 66 eh.

Is it so easy to retire on dividends? What are some problems that I may face?

Technically, yes. It is mainly a numbers game, so it’s doable.

And I’m not the only one sharing about this. Google ‘financial independence retire early’ (FIRE) and you’d see that there are tens of thousands of people like me, who dont want to be stuck in a job and retire at 70.

That doesn’t mean it’s easy and linear. Of course, there are variables that can happen. Kinda like preparing for doomsday, likewise, I believe in being prepared.

Some variables and the ways I can anticipate and overcome them are:

What if the stock fail?

This is a real risk, so the issue is to either (1) not go all into just one dividend stock, which isn’t smart at all. I would have at least 15+ dividend stock and rebalance yearly to weed out poor performing ones; AND/OR (2) go into Vanguard stocks, which have historically been giving a return of 10% per year.

There are literally hundreds of other instruments out there other than dividend stocks, so find what you’re comfortable with.

What if I dont have enough?

Ah, this is an eternal dilemma, so back to maths of current expenses AND project to include inflation and increased spending PLUS keep costs low. So if I can keep my lifestyle yearly expenses to $3K/month, I will over-buffer a 30-50% at least into investment, so my investments need to payout at least $4K/month. I will reinvest the $1K/month. Depending on how safe is your number, you should buff it at least 50%. I personally will over-buff by at least 100% and diversify into different asset classes eg dividend stock, rental properties, crypto, insurance etc.

What if I die earlier than achieving this? Wont my effort be in vain?

From a practical standpoint, if you die earlier, then you dont have a problem anymore with regards to money. However, that’s if you’re single and have no one or no causes you care for. If you’re like me, having a plan, will leave a legacy (cash and more) to them, rather than leave them a pile of bills to clear. The real question is if you live and spend wantonly…but find yourself outliving your money, that would be a nasty place to be. Lastly, this is why I always recommend to “eat” and enjoy a portion of your dividends and passive income, because we need to live too to make it sustainable.

What if I lose my job / source of income midway?

Okay, that’d suck, but it wont suck as bad as losing your main source of income and have zero passive dividend income. If say your goal was to amass $360K on 10% return, midway means that you’d amassed $180K and at 10% return per year, you’d have $18K/year or $1.5K/month dividend to tide you over. Not bad, and it’d allow you some breathing space as you source for your next job. You may be able to retire in a cheaper country with $1.5K/month too.

A more important question: WHY

It’s one thing to talk about the numbers and the how, which is easy to talk about and can be easy or moderately hard to do over a period of time. A bigger and more important thing to consider is why.

What would retiring at 45 years old mean to you? It can mean different things to different people, such as

  • spending time pursuing people and projects you care about. Finally, you can pickup something you put down decades ago. Could be photography. Could be drawing.
  • travel
  • taking care of loved ones who may be sick and need you
  • retire your wife and spend more time with her just being with the woman you fell in love with all those years ago
  • take your kids to school and back, and being a dad who is present. Like really, really present.
  • and much more

The why is infinitely more important.

Easiest $100 passive income stream you can create

There are just so many ways to create streams of passive income, but my favorite way of passive income is still the good ‘ol dividend stock passive income.

Dividend stocks are public-listed company stocks that make regular distributions to their shareholders, usually in the form of cash payments.

How dividend-paying stocks work

  1. their share price is X dollars
  2. they pay a dividend per share you own

That’s it.

Example: Company ABC whose stocks pay out $0.25 per share, if you own 500 of their shares, you get paid $125. Usually dividends are paid twice a year (bi-annual) or four times a year (quarterly).

Beautifully simple passive income strategy

  1. buy and accumulate dividend stocks
  2. reinvest at least 50% of dividends
  3. keep buying and accumulating dividend stocks
  4. UNTIL your dividends per year are more than your living expenses

#1 problem of dividend stock investing

You need to have a big chunk of it to work (because the returns are 3-7%+ per year); so depends on how much you spend, you may need more. Say for example, if you spend $4000 a month, then if the returns of the dividend stock is 3% per year, the amount you need invested will be

($4000 x 12) / 3% = $1,600,000

No one has $1.6M lying around eh. It’d be nice, but most regular folks wont have that.

But if you only need $2000/month, that’d mean you “only” need $800,000, which is a lot more easy compared to $1.6M. Maybe you work part time to supplement the $2000/month, or you just spend much lesser.

4 ways to play the game if we dont have that big chunk of cash

Time.

Compounding interest works most magically with time, so the longer time you have, the more it can work its magic.

Example: Sally invests $1000/month for 30 years versus Adam who invests $2000/month for 15 years, will they yield the same amount? Assuming dividend yields are 5% and all dividends are reinvested:

  • After 30 years x $1000/month x 5% per year reinvested, Sally will have: $837,129.48
  • After 15 years x $2000/month x 5% per year reinvested, Adam will have: $543,779.80

Interesting right? It’s all compound interest magic…that runs on time. So invest as early as you can.

Earn more

You can invest more by earning more, and one of the low hanging fruits are to negotiate for a higher salary. If you’re underpaid, it’s easier. Or look for what your competitors are paying in the industry, and switch.

If not, the other options are starting a side hustle:

  • quick money can be done by app-powered hustles such as Uber, Lyft, DoorDash and similar offerings
  • starting a blogging business is highly recommended, but man, it does take time (at least 12-24 months) and consistent action for it to yield good returns.

Save more / spend less

Saving more is doable when you have a lot of unnecessary spending already, such as if you’re already paying $3000 for monthly car installment, and then yes, you can either refinance or sell the car for a cheaper second hand options or take public transport.

This approach unfortunately do not work with individuals who have just enough.

Another method, is to look for higher yield dividend stocks

Instead of 3% return per year, can I get 6% per year? Or 10%?

If Sally invests:

  • After 30 years x $1000/month x 7% per year reinvested, Sally will have: $1,212,876.50
  • After 30 years x $1000/month x 10% per year reinvested, Sally will have: $2,171,321.10

Big difference.

Then what?

Keep building more and more of that $100/month passive dividend income streams.

Yes, you can enjoy some of the dividends along the way (at least 50% of dividends should be reinvested, to grow your nest amount as well as counter inflation.

Keep going UNTIL you reach your passive dividend income goal.

Why this person earns $12500/month but is miserable and wanted to die

My friends shared this article and I wanted to discuss this case study with you.

So according to the article, he earns $12500/month and he says:

  1. he lives paycheck to paycheck as there are lots of things to pay for
  2. when compared to his school mates, he’s doing well but in the tech industry, he’s at the lower end
  3. he thinks most jobs are going to be the same: stressful and fast paced
  4. thought about dying but dont want to be irresponsible for aging parents

What I will do if I am in his shoes earning $12500/month

I’m gonna put myself in his shoes and make some assumptions (I am NOT a psychologist) and this is based on what I’d do from a personal finance standpoint:

Hardcap spending to max $5000/month

He said that he lives paycheck to paycheck because of

  • mortgage loans
  • insurance bills
  • medical expenses
  • rising cost of living eg food
  • etc

I will revise all the expenses, and cut down aggressively.

  • If I live in a condo that takes a big chunk of my pay, I’ll downgrade. A HDB is fine. If I live by myself, co-living is not bad too.
  • If I have insurance that I dont need, I’ll cut back and downgrade
  • Medical expenses may need to be refinanced
  • If I eat out $2000/month, surely I can cut back to $1000/month?

I dont know the details, but that’s some rough idea.

The budget will be $5000 all in so that…

$7500/month to be invested into dividend paying stocks

Assuming

  • invest $7500/month
  • dividend stocks pay 8% per year
  • reinvest every single dollar

In 5 short years, I will have $570,233.61. At 8% dividend yield, that’s $45,618.68 in dividends a year, or $3,800 a month of decent dividend passive income. I can live comfortably in a cheaper country such as Malaysia or live a bit more frugally in SG.

In 10 short-ish years, I will have $1,408,093.87. 8% per year is $112,647.51 which is $9,387.29. Based on hardcap $5000/month spending, I can retire on $6000/month and still have $3,387 “spare” to reinvest.

Note: it is likely when we stop working, we spend significantly lesser because we spend lesser on conveniences and transportation. Think about it.

Food in town hawker is about $8-10 a meal, with drinks; cafes around $20 and restaurants between $30-50. Watching a movie $15+. If we work part time or are retired, we’d likely be lessed stressed, which means less inclined to spend on conveniences like paying for food outside.

  • We may cook more at home.
  • Go for long walks or enjoy activities in an unrushed manner that doesn’t cost much.
  • We may even watch shows on computers.
  • We wont need to rush around in taxis or paying to rush food delivery.

I’m not saying to be a recluse when we retire, but I anticipate our costs just goes down significantly, and we may need less than we currently spend.

Burnout, stress and mental health

He probably

  • is stressed from the fast paced work and pressure
  • comparing to others down and up of him
  • feels stuck

Like I said earlier, I’m no psychologist or mental health therapist.

I’m also not going to say the cliche thing of “ah, you just gotta stop comparing” – it’s not so easy to stop that. It’s human nature.

I do think that he feels lost and that “it’d be like this forever”…because he doesnt have a personal finance and early retirement plan. That’s why , I’m pushing for you and me to do something that we can do:

  1. save more (flat amount OR percentage) of income including bonuses
  2. chuck all those into dividend passive income stocks
  3. spend some dividends BUT reinvest most of those delicious dividends until your yearly dividends is significant enough to retire on

The reasons why I focus on this

Happiness not included in office/work

I dont assume that work or being in office will make me happy. If it does, great. But I assume work may never make me happy (who dies thinking of “I should have worked more…?” anyway). So I will not link happiness to work.

Optimize for dividend passive income

I assume happiness and contentment may be outside of work, so what I will need to do is to build a passive income portfolio that will pay me continuously, so I can choose to not work and instead, pursue projects and people that may be of interest to me.

Will it bring me happiness? I dont know. I can just explore and find out.

Regardless, once my dividends are more than my living expenses, I can then choose to work less, retire, change job or pursue other stuff that I may be interested in. Maybe draw, travel, marry, who knows? Maybe even when I’m financially independent and free, I’ll still be working, just that I’ll be more selective of the people and projects I want to be involved in and with much less stress.

The key here is I want you to take the steps to continue building streams and streams of passive dividend income from your salary. And reinvest all the dividends until the dividends are good enough for you to have more life options.

PS: dont consider or commit suicide, ever. That’s like choosing a permanent solution to a temporary problem…plus there’s so much things to do, places to go, people to visit…or even things to discover in life.

What do you think? Share you ideas in the comment below.