Passive Income Challenege (tracking results)

 The passive income challenge is about reaching your ultimate goal which is achieving financial freedom by generating passive income. Below i discuss this topic and i explain how i will present my results and i suggest you use a similar method if you want.


When it comes to tracking your results the straightforward way is to count the dollar amount or euro amount or whatever your currency is to see your results. When you share your results though,  I find there is a more meaningful way to show your results and track how far you are from your passive income goal.

The currency confusion is the first obstacle in making your results universally understandable.But even if you use the same currency with your audience, there is one more thing you should consider. The value of money  is different in different countries and to different persons.  That's because the cost of living , wages and spending habits are not the same in every country. The lifestyle of people that surround you, have also an effect on your spending decisions.It's not about you following the crowd or not, humans are designed to compare themselves to those that are close to them. In a city where everyone is rich, you dont feel as rich. Socializing also has a cost, your social status has some basic costs requirements that must not diverge too much from your peers. Therefore,  the "nominal" passive income has a different effect, depending on who you are.

Since your socioeconomic background and your individual personal situation  is different, a better metric to show how far you are from your passive income goals is to use  a metric that can be more understandable. This is  a % of monthly wage . This can be a minimum wage, a typical wage ,a wage that you specifically   can   achieve by working in the market  or  you can choose  to use a household income as your metric.

Another benefit of presenting your results this way is you keep your information private. And privacy is very important.


After that there are are 2 ways  to track  your monthly passive income. I chose monthly because that's how most people think.

1) Actual Passive Income

The most obvious one is by tracking every  month how much did you get from your investments in place. That's a fine way if you have predictable monthly cash  payments that dont move by a lot month to month.On the other hand payments that are not  paid at a monthly schedule or  gains from  price appreciation of stocks that  arent realized until you sell the stock are harder to track monthly. A solution to this is to try smooth those returns by getting an average  of gains over a longer period. I will use a quarterly and a yearly schedule. This is helpful because by doing that you realize that not only cash returns are passive income.In the stage of building your way to Financial Freedom  getting cash from your investments only work as a risk protection  to secure those returns, these returns are also taxed  something that doesnt happen with price appreciation  until you sell . if you are working on growing your portfolio you  will end up re-investing those returns  until you reach your ultimate goal, accounting only cash payments as passive income will make you feel the need to make investments that pay cash as soon as possible just to see that you get passive income. Thinking that way isnt the most efficient way on your way to financial freedom.

2) Sustainable Passive Income

The second way is inspired by the 4% rule , this is the potential passive income. This is the expected passive income you can get safely from your net worth. This accounts the cash you have and the market value of your investments. This is the best way to think since  it helps you focus more on the final goal. The process is the following

• step 1) Find your Net worth, cash you have plus market value of investments you have

• step 1) Choose any returns below 4% , these are safe cash returns you can expect getting from that Net worth

• step 3) Divide by 12 to find your monthly passive income.

Summary

1) Your passive income can be transformed into a  % of a monthly  wage. If you reach 100% of a monthly wage , well done you can get this wage passively without working and that's your goal.

2) If your monthly passive income isnt stable you can average your passive income over a longer period . This is extremely helpful if much of your profits come through price appreciation of stocks that can vary from month to month.

3) Check of how safe is your passive income. See your net worth, a good proxy for a sustainable passive income is anything that yields below 4% yearly . That's a more conservative way to look for your potential passive income even if you havent started investing yet.