How To Calculate Passive Income

As we mentioned earlier, creating a stream of passive income is your main goal in life. It’s not about making as much money as you can during a given time period, but instead investing in assets that will yield constant revenue for years to come.

With all great things, there are always costs involved. In this case, those costs include education, training, and investment. By having these upfront, you are more likely to create a steady flow of revenue!

Luckily, it doesn’t take a lot of people to make this happen. Most people who earn significant amounts of money don’t do so through intensive study or big investments, they built their wealth from sources such as dividend payments, t-shirts, and giving lessons.

Here are some tips and strategies for how to calculate passive income.

Calculate your monthly savings

how to calculate passive income

The next step in calculating passive income is figuring out how much money you need to save every month to make this goal happen. This can be done by taking your monthly expenses and dividing them by the number of months needed to meet your passive income goal.

For example, if you want to earn $1,000 per week or about $50,000 per year passively, then you would have to set aside $7,500 each month or $900 per week!

This comes from not being able to spend more than that amount each month on things like rent, utilities, etc. It also includes what we call “passive” costs such as for example, if you wanted to start teaching, you would need to have adequate training and certification which cost money.

There are many ways to achieve this budget. Some people choose to work outside of the house so they do not have to pay for housing-related expenses. Others choose to live in less expensive areas closer to where their jobs are so transportation costs are lower.

Whatever method works best for you, remember that it should feel like you are spending money on things that don’t require too much effort, not because you were trying to conserve money.

Calculate your monthly income

how to calculate passive income

In order to determine how much passive income you have, you must first know what defines as “passive” income. The term passive typically refers to revenue that comes in without too much effort or stress. It is also referred to as non-monetary return.

Most people associate money with stress, which is why it can be hard to identify how much passive income you have. However, there are several ways to measure this.

One way is to look at the amount of time spent working on behalf of your business. By looking at the length of time needed to earn your next paycheck, we can calculate how much passive income you have. This is called pre-tax passive income.

Another way to define passive income is net profit. Net profit is the difference between costs and revenues. Because cost include things like rent, utilities, and website hosting fees, we can compare one year to the next to see if your income is increasing.

There are many different ways to track your passive income. You do not need the same level of detail for every method, but you should add at least one source into your calculations.

Calculate your annual income

how to calculate passive income

Along with determining how much money you need to live, another important factor in achieving financial success is calculating your annual income. This is simply looking at your monthly income and dividing it by the number of months in the year to get your yearly income.

For example, if your monthly income is $2,000, then your annual income would be $24,000 per year! To achieve financial freedom, you want to have an abundance income so that you have enough to pay all of your bills and enjoy yourself financially.

Another way to look at this is to aim to earn more than you spend each month so that you remain well-fed while investing the rest for future growth.

You can also read our article here about how to save money online without spending too much. It’s always helpful to do some research before starting to invest in things such as Amazon vouchers or apps.

There are many ways to increase your passive income, but the first thing is to determine what kind of income you want. More investment oriented people may want to consider becoming a business owner or investor. Others may choose to strive for wealth through real estate. No matter which route you pick, just make sure you are confident in yourself and your abilities and know what you are doing.

Multiply your annual income by 12 to get your monthly income target

how to calculate passive income

While most people focus on how to make an extra dollar of passive income, there is another way to look at it: what amount of money you want to earn per month!

Most successful entrepreneurs multiply their yearly income by twelve to determine how much they want to spend each month on additional income sources. This gives them their monthly income goal.

By setting a lower limit on monthly income, you will be more likely to create those income streams and achieve that goal. It also helps prevent you from spending too much money on expensive gimmicks or unnecessary services that won’t work.

Instead, use the rule of multiplication to establish your minimum monthly income. Just like with our example above, find your monthly budget allowance and then double it.

Your daily budget can easily be doubled as well. For example, if your allowed budget for food is $200 per day, then have a budget of $400 per day — twice the original size.

Subtract your monthly expenses from your monthly income target to determine your monthly profit

how to calculate passive income

Now that you have determined how much money you make per hour, what you spend those hours doing, and where you want to spend your time, it’s time to calculate how much passive income you can achieve in a year.

Most people get hung up here because they don’t know what their monthly income is!

Many people assume that their “monthly income” includes things like their salary, potential bonuses, and dividend payments. But many of these items are not constant each month, so this assumption isn’t very accurate.

Instead of looking at your total monthly income, look at net monthly income. This is the amount of money left over after all of your basic living costs (rent or mortgage, utilities, groceries, etc.) have been paid every single month.

By figuring out how much net income you have available for investing, you will be able to identify whether or not you are capable of achieving your investment goal.

Calculate your savings target

how to calculate passive income

As we mentioned before, passive income is simply income that keeps coming in while you spend less time working on it. With this definition, it becomes clear that spending more time doing something means having lower levels of “passive” investment.

The easier way to look at it is like eating for wellness. If you are hungry all the time, then you will be investing in food (by buying things such as groceries) and staying hungry.

If you want to stay healthy, you should not eat too much. So instead of investing in food, you invest in health by engaging in activities that take up your time but do not cost anything extra.

Examples of these types of activities include swimming or yoga classes, taking fitness courses at a local college or university, practicing yoga at home, reading about personal finance books, etc.

These activities can be done daily, weekly, monthly, or even yearly depending on what your budget allows. No matter when you choose to engage in them, just make sure you are consistently investing in yourself.

This article will help you determine how much money you need to save for your overall retirement fund.

Subtract your savings from your monthly income target to determine your monthly loss

how to calculate passive income

Many people get hung up on how to calculate their daily, weekly or monthly passive income goal. This is totally fine! But what about the difference between spending money to achieve that dream versus keeping more of the earnings for yourself?

The tricky part comes in defining what it means to “save” for your family. What if you spend the same amount each month to live a comfortable life as you would by saving 10% of your income?

You would have the exact same balance at the end of every month even though you spent less than most people who aim to save consistently. It all depends on what you consider to be adequate savings for your family.

There are many ways to calculate your passive income goal. Some like to subtract their annual living expenses from their yearly salary to come up with their monthly savings goal. Others prefer to deduct their monthly bills (mortgage, utilities, etc) to see how much left over they have for other expenditures.

Either way, you should know that having more saved up is better than living beyond your budget. The cost-effective solution is to increase your active income so that you can devote more of the remaining funds to investing.

Investing in real estate, stocks, retirement accounts, and diversifying your investments are some of the best ways to accumulate wealth. More importantly, this type of investment can easily turn into an additional source of income or even a second career if you choose to go down that path.

Multiply your monthly loss by 5 to get your annual loss target

how to calculate passive income

So how do you calculate your passive income goal? First, you want to determine your monthly loss. This is simply your current monthly salary times 2 (to be paid for two months) plus your mortgage payment, if you have one.

Then, multiply that number by five. Why multiplication by five? Because most successful business owners we know are paying an average of $5,000 per month in additional expenses. These can include costs like childcare, housekeeping services, dog care, etc.

By multiplying your total monthly losses by five, you’re accounting for this extra money! Most wealthy people we know spend around this amount each month.

This way you will be close to being a millionaire in just under a year if you keep up with spending what already works for others. You will also need to save at least as much as these new cost savings opportunities so that you don’t go over budget.

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