Passive Income: How Much You Need Invested To Make $200 Per Day

How much money do you need to live off your investments? I bet most people would be at least a little curious about this. I'll explain exactly how much you need and how to reach that goal. 

I've been really interested in this topic since I learned about the Financial Independence Retire Early (FIRE) community in my early 20s. This group is known for obsessively tracking your spending, making smart investments, and growing their wealth until it covers all their daily costs. 

When I first heard about this, I was hooked. For the past 5 years or so, I've focused on living off my investments, keeping my expenses low, and letting my savings grow. 

Having investments like this lets you choose to do whatever you want, as long as it's legal. 

The first step is to figure out how much money you need and then plan how to get there. So, let's dive into how much you need to live off your investments and what steps you can start taking now.

The 4% Rule

To figure out how much money you need to invest, first you need to know how much you spend each year. 

This can be tricky because many people don’t keep track of their spending. If you spend a lot, like $200,000 a year for a big family, you’ll need more money invested than someone who spends $15,000 a year and is very careful with money like using coupons and renting out a spare bedroom. 

So, if you don’t know how much you spend, it’s hard to figure out how much you need to invest. 

For this article, let’s use the average American income of $59,228. We’ll use this number to figure out how much you need to invest to replace that income completely. 

The first and easiest way to do this is called the "four percent rule." This rule says you can safely spend four percent of your investment each year without running out of money. 

The idea is that if your investments grow at about seven percent a year, adjusted for inflation, you can spend four percent and still have your money grow and last through good and bad times. 

So, to replace the average American income of $59,228, you would multiply that amount by 25. This gives you $1,480,700. 

This means roughly you need about $1.5 million invested to replace the average income using the four percent rule. 

This is a simple way to figure out how much you need.

Dividend Stocks

The second way is with dividend stocks. When you buy a stock, you are actually buying a small piece of ownership in the company. 

For example, if you buy a share of Apple, you own a tiny part of Apple. And by tiny, I mean about one out of the 15 billion shares Apple has. 

Now that you own a small part of the company, some companies give you what's called a dividend. This is a share of their profits for owning their stock. 

For example, Apple pays a dividend of 0.46%. This means if you invest $100 in Apple, you'll earn 46 cents in passive income. 

To make as much money as the average American income, you'd need about $12.9 million invested in Apple, which is a lot and probably won’t happen. 

But thankfully, there are other companies that pay more dividends. 

For example, Verizon pays 6.6%, Pfizer pays 5.3%, Exxon pays 3.2%, and IBM pays 3.5%. If you invest in these stocks with high dividends, you might need less money to replace your income. 

But just because a stock has a high dividend doesn’t mean it’s a good stock. For instance, even though Verizon pays a 6.6% dividend, its stock price has gone down over the past five years. 

On the other hand, Apple’s stock price has increased by 320% despite its lower dividend of 0.46%. Another issue is that companies can and sometimes do cut or stop their dividends if they’re not doing well. 

For example, in 2020, during the Covid-19 pandemic, 187 companies cut or stopped their dividends. So, if you only depend on dividends for money, it can be risky. 

Dividend stocks can be part of your investment plan, but you should also look at how well the company is doing overall. It's best to pick stocks that pay dividends and also go up in value, like Apple

Real Estate

Finally, you can try investing in real estate to reach your goal faster. 

If you’re willing to work at it, real estate can be very helpful. 

For example, instead of using $20,000 to buy stocks, you could use it as a down payment on a $125,000 house that rents for $1,000 a month. But you won’t keep all of that $1,000. You’ll need to pay $450 a month for the mortgage, $50 for insurance, $100 for repairs, and $100 for vacancies and other costs. 

This leaves you with $300 a month as profit. 

With a $20,000 investment, you’re making an 18% return. You’re also paying off the mortgage and hopefully, the house’s value is going up. 

To replace the average income of $59,228 a year, you’d need 17 properties like this, each making $300 a month. This means you’d need to invest about $340,000 for these 17 properties. 

A quick disclaimer here, this is a very simplified example. Real estate investing can be a lot of work and finding good deals like this can be tough, but not impossible. 

Even if your profit is only half of what we’ve talked about, so 10% cash on cash returns, you’d need to invest $592,000 in good deals to replace the average income of $59,228. It’s important to do your research before starting. 

But if you’re ready to work and manage the properties, real estate can help you retire with less money.

Comparison

So as you can see, we have a bit of a spread here for how much money you’d need to make $59,228 a year. 

• With real estate, you’d need around $592,000 if you get a 10% cash on cash return. 
• For dividend stocks, you’d need about $1,200,000 with a 5% return. 
• And if you use a 4% withdrawal rate, you’d need around $1,480,000.

Five Steps To Get There

To figure out how to reach those investment numbers, as you probably don’t have an extra few hundred thousand dollars just lying around. 

So, here’s what you need to do, and this applies to any option you want to take. 

First, start by tracking your spending. It sounds simple, but many people don’t do it. In fact, I bet 90% of you here won’t even try it after hearing this. You can use free tools like Spendee or Mint. Just sign up, and then keep track of where your money goes for 30 to 60 days. 

Second, after you track your spending, look for ways to cut back on things you don’t need. As you track your money for 30 to 60 days, you will be able to see what things are not needed. For example, if you see you spend a lot on coffee or impulse buys, you can make changes. This can help you save 10 to 20 percent of your budget by just paying attention to it. 

Third, take the extra money you saved and put it into investments. You could use it for a Roth IRA, a low-cost index fund, or save it to buy real estate. Just make sure to invest that money right away. 

Fourth, think about finding a new job or changing your career. I’ve said this before, but I will repeat it because it’s really important. Studies show that people who switch jobs every two to three years often make about 50% more money than those who stay in the same job. Even switching jobs just once can give you a 15% raise on average. If you’re not making as much money as you want, finding a new job could help you earn more. Then you can save and invest that extra money. 

Fifth, build up your investments slowly and keep reinvesting your earnings. It takes time to reach your goal unless you get very lucky with individual stocks that go to the moon or you work very hard buying a lot of real estate. 

Even if you need $600,000 to $1.5 million to reach your goal, you don’t have to save all that money by yourself. You can speed things up by reinvesting your profits. 

For example, if you make $300 a month from renting a property, use that money to buy more stocks or real estate. Or if you get a 5% dividend each year, set it up to automatically reinvest so you now have an extra 5% that’s earning you another 5% return. 

Over time, your investments will grow to the amount you need. 

Also, if you spend less than $59,000 a year, you’ll need less money invested. But if you want to spend more than $59,000 a year, you’ll need to invest more.

What I Would Do

If I wanted to replace my income by investing, I'd use all three methods: real estate, dividend stocks, and index funds. 

Real estate can be a lot of work at first. It feels like a new full-time job because you have to find the right property, fix it up, rent it out, and manage repairs. Some people think real estate is risky because you borrow money, but when done right, the main risk is the property staying empty for too long. You can avoid this by picking a good neighborhood, checking tenants carefully, and setting a fair rent. So if you like real estate, I say go for it, but don’t rely 100% on it. 

Same goes for dividend stocks. But just because a stock pays high dividends doesn’t mean the payments are safe. If the company struggles, they might cut or lower the dividends. Also, the stock’s price might not go up. Some stocks offer good dividends but don’t see much price increase. 

Lastly, the four percent rule with index funds is the safest, needing the least work and having the least risk. However, it takes the longest to reach your goals. If you want to grow your money faster and be more active, using only index funds might not be enough. 

To balance risk and possibly earn more quickly, you can use all three strategies: invest in real estate to leverage your money for higher returns, buy reliable dividend stocks for steady income, and also invest in diversified index funds as a backup. This way, you can make faster progress and have backup plans if one method doesn’t work. 

One more thing is this idea that helped me replace my spending with investments, which is avoiding lifestyle inflation. This means when you start to earn a little more money, and you also start spending a little more. Many people fall for this trap. 

Instead, save any extra money and keep your spending the same. Just pretend that the extra money doesn’t exist. In fact, I’ve done this since I finished school. 

No matter how much I earned, I kept my expenses the same and invested the extra money. This helped me build enough investments to cover all my costs. 

Overall, the math behind is simple, the hard part is sticking to it and not spending more just because you earn more. 

Thank you for reading, cheers!

- Ivan