Passive Income Approach

From a financial perspective, I am following my ___ commandments as my passive income approach. The number is not yet final, as this page will be updated on the go as things progress on my passive income approach.

These aspects are following my life and my situation. This is not a proposal on how to get from rags to riches, or how to become financially stable. Not even on how to manage a vast wealth, although I hope it would be some day. These are just the rules of the game, the discipline that I set for myself to follow in order to reach my passive income goals.

1. Always put away a part of your income for yearly expenses

On a monthly basis, always put away a part of your income for yearly expenses (regardless of how much you make). This is not the rainy day fund. This is in order to not take a short-term loan or start using savings for a yearly expense that you know will come.

Example: In my case, I set aside ~1,000 EUR a month for the yearly expenses: household taxes, auto insurance, house insurance, life insurance, car service, etc. My monthly in and account split can be found here.

Hint: It would be best if this was a savings account with interest to date. Mainly, if I put in 1,000 EUR a month for 3 months and do not use it, with an interest of 1% a year I have a profit of ~5 EUR before taxes after I withdraw 2,000 EUR after 2 months. Let’s say 4 EUR after taxes for doing absolute nothing. This is not much, but it builds the discipline.

2. Always put away your savings before you start spending

Once your money is in the account and the yearly expenses put away, it is time to put away your savings for that month. The concept is well-known: Save first, spend after. Some tend to call it “pay yourself first”.

Example: In my case, we set aside ~1,200 EUR a month for the rainy day fund. We are thinking to put a maximum limit on this around 50,000 EUR and then start investing. The stats at the time of writing this update are:

Amount Deposit Period Interest Earnings
Rainy Day 25,000 1 year 1.40% 350
Opportunities 25,000 1 year 1.40% 350

Hint: This should be a deposit as they are secured (mostly up to 100,000 EUR) per account owner/bank. If you have more, it is simple: use multiple banks.

3. Diversify

This one is a simple one, you should not have all your eggs in the same basket or all your stars in the same boat. Diversify your portfolio across the areas you are willing to invest in. Base this on your risk profile for each of the areas.

I would recommend that you diversify in areas that you know as it will be easier for you to comprehend familiar things within your passive income approach.

Example: The best example I can give is what I use. The reason I state best example is because this is the one for me, made by me. There are a lot of examples over the internet and you can inspire yourself or based your decision on them. You can find mine under my portfolio.

Hint: just like me, you may not be able to have the ideal diversification you want from the start, but set your goal and work towards it via your portfolio diversification.

4. Time value of money (TVM)

You should always consider the time value of money for any big expense and to re-assess if it is worth paying the lump sum now or if installments or a payment later down the lite is more advantageous.

Example: You have 25,000 EUR and want to buy a car, but you have 2 options:

  1. Pay 24,000 Now
  2. Pay 14,000 Now and 11,000 in 3 years from now

In order to know which is best, you should calculate the present value of the 11,000 future payment. Assuming a 7% return on investment and 2% inflation rate then the 11,000 would = 9,502 today, thus option 2 is better as long as the previous assumption is maintained.  

Hint: You should check this for any considerable investment or expense.