Passive Income is King

zero day finance passive income money dollar bill

When it comes to early retirement, everyone tends to focus on net worth. Seriously, net worth is king. I track mine every month, and there are plenty of others who do it as well. Many of the personal finance blogs on Rockstar Finance also track their net worth. But is this the right metric to track? Should we spend all of this time meticulously counting every quarter to determine “the number?” Probably not. We should focus on passive income.

Net Worth Stinks

Okay, net worth doesn’t really stink. But a bunch of people track it. What is net worth anyway? It’s actually pretty simple: take all of your assets, and subtract your liabilities. The result is your net worth! For example, let’s say that you have $50,000 in the bank, own a $300,000 home, and owe $100,000 on your mortgage, your net worth would be: $50,000 + $300,000 – $100,000 = $250,000.

Net worth is a great way to track your financial progress. You can see how much you are both saving and investing. It’s also pretty addicting. We’re in a very long bull market, and our net worth keeps jumping up, even if we don’t add any more money to our portfolios. But net worth doesn’t tell the whole picture, not by a long shot. The reason is that not every element of your net worth is created equally.

Certain components of your net worth, such as investments, may increase in value and even pay dividends. This is extremely good because you have money that makes you money! But what about other assets, like a home? Let’s say that you have a $300,000 home. You live in that home which is great, you might not even owe a mortgage. But other than providing shelter, what does that home provide for you?

Not much to be honest. You’ll count the $300,000 towards your net worth, but you can’t quickly sell it. You owe taxes on it ever year, and things break all the time. Buying a new HVAC system is expensive.

What is Passive Income?

Passive income is awesome. Passive income is the best income. Passive income is when you make money by doing nothing, by being passive. The best example is when you invest money. Let’s say that have $100,000 invested in a mutual fund. That mutual fund will pay dividends each year. Let’s say that the dividends are 2%. This means that every year, you will get paid $2,000 simply for owning shares of that mutual fund! You can also have passive income from other investments, such as rental properties.

Passive income is the best type of income because you don’t need to work for it. When you receive your paycheck, you traded your time for money. A modest trade. But you receive passive income regardless of what you’re doing, even while sleeping. The more you save and invest, the more your passive income grows. At some point, you might earn more passive income than your day job. You might even earn more than you spend. When this happens, you have reached financial independence.

I recently asked the Twitter community how much passive income is enough to reach financial independence, and then retire early. I got a large set of answers, and the results were surprising.


So, I may have messed up the poll. Oops. Option 3 should be $60,000 – $100,000. The main takeaway is that “lean FIRE,” retiring on less than $30,000 per year, isn’t desired by most people. Sure there are people who do it like the folks at early retirement extreme advocate for it, bust most people don’t want to.

We also see that it’s a pretty even split between $30,000 to $100,000 per year in desired passive income. Creating this level of passive income isn’t easy. In fact, it takes decades of determined investing. But what type of net worth do you need to create this passive income? Does net worth even come into the equation?

You could have a $1 million+ stock portfolio and a $500,000 mortgage that would generate $40,000 in passive income per year on your $500,000 net worth. But you could also have a $250,000 stock portfolio and a $250,000 paid off home, and you would barely generate $10,000 in passive income on your $500,000 net worth.

While net worth sort of indicates your total passive income, it doesn’t provide a lot of precision. Most Americans buy homes instead of investing. There are plenty of Americans who have a $500,000+ net worth and $0 passive income because they haven’t invested.

Passive Income is the Goal

When it comes to early retirement, your net worth means nothing. Seriously, don’t focus on your net worth. You need to pay attention to your passive income. You are making many investments, how are they paying off? Is your stock portfolio providing you with a nice dividend check every month? Do you invest in property and collect rent checks?

Whatever your strategy, it doesn’t matter. You must build passive income so you can retire early. Without it, your net worth is a fairly meaningless number, and you won’t be able to comfortably retire.

Good Hunting,

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39 Responses

  1. Ty Roberts says:

    This is spot on. Net worth is just another indicator on my financial dashboard, but passive income and growth is what I’ve got my eye on.

  2. thefinanciallysavvy says:

    Would you then favor investing extra cash over saving for a house? I think there a pros and cons to both: Investing the cash would lead to a bigger portfolio over the long term (and thus more dividends) whereas a purchased house, once paid off, means your biggest monthly expense is now off the books, requiring less income to live.

    • David says:

      To be honest, it depends on your goals. If you want to LeanFIRE as quickly as possible, you probably want to invest 100% of your money and move to a small town where you can rent a 5 BR house for $500 a month. If you want to raise a family, send kids to college, then owning a home might be the right decision.

      I will say that a purchased house, once paid off, is not an investment. Your primary place of residence is not an investment because it does not produce any supplemental income. Yes you can eventually sell it, but then you lose the benefits of owning a home (paid off mortgage, mortgage interest deduction, a place to call your own, etc) and selling isn’t trivial. Plus you never know what the real estate market will look like. Selling your home can be very difficult compared to the billions of dollars worth of stocks that change hands every day.

      To give a better answer to your question, I actually have 4 experts weighing in on how much passive income they need to FIRE, and how they plan to get there. I’ve asked business professionals, real estate investors and even people who run AirBnBs full time for their input. This will be posted on Thursday, so I would definitely suggest stopping by then and I’m sure they’d be happy answering your questions!

      • thefinanciallysavvy says:

        I would agree with that – it really does come down to your own goals. I am not pursing LeanFIRE (or even the full RE part of FIRE, necessarily) but still agree that passive income is key to financial independence. House vs. Investing is an interesting trade off to consider.

        Looking forward to that post on Thursday! Full time AirBnB sounds interesting.

  3. 100% agree with you here. Someone who has a low net worth but brings in $2k-$5k per month from their own business has more freedom than most high net worth individuals. Passive income lets you live how you want, regardless of your net worth.

    • David says:

      Absolutely, that’s the point! You can even combine a negative net worth, strong passive income, and nerve of steel to retire early.

  4. Chris says:

    This is 100% on. What’s funny, when I first started looking into FIRE. I asked on twitter “which is more important, cash flow or net worth?” And one huge blogger, echoed by others, said “net worth.” I’ve doubted it because I have a net worth of $450K, with $130K being my house and maybe another $25K being other property, and basically zero passive income. I’m not going to stop investing in stocks, because I do see the value in diversification. But I am super focused now on real estate investing and digital business as a way to build passive income.

    • David says:

      Thanks for your comment Chris! Everyone focuses so much on net worth. We all have ours posted on Rockstar Finance. Maybe we should also have a passive income section on there as well.

  5. Couldn’t agree more with this assessment. I think it’s important to keep track of your net worth, but if it’s not generating any actual income for you in some way, it isn’t a useful assessment to know how well off you are financially should you decide to retire.

    Especially with a house, which is difficult to sell and not have a replacement cost in some way (unless you already own a second property, are going to live in an RV, etc.) I thought it always over-inflated numbers. I’ll definitely have to check out Thursday’s post for more on this!

    I’m definitely more focused on building up income streams, which will have a positive impact on net worth. Overall though, I think the passive income is a better indicator of if you’re ready to quit the 9-5.

    • David says:

      One way to get into real estate investing slowly would be to buy a primary residence, pay it off ASAP (within 10 years). Then you buy another house and rent out your old one. Now you’ve got a massive amount of passive income right there, and you can use your day job + passive income to pay off your second house quickly. You can rinse and repeat, and end up with a few properties in 20 years that will support your lifestyle.

      • I had tried to do something kind of similar a few years back. I had an offer in on a duplex; I was planning on living in one unit with 2 roommates, and rent the other unit out. I’d have netted about $750-800 each month above my mortgage.

        The property was part of an HOA, though, and the mismanagement of it meant there was no money to fix the roof – something I needed to go through the HOA to do – and I couldn’t get financing without it. It had a couple other issues as well. Long story short the deal fell through, and two months later I decided to move to California. 🙂

        • David says:

          Life likes to force us to make decisions, whether we like it or not. I personally would never buy a property that is part of an HOA because of exactly that (and horror stories from Reddit). I’d call it a very good decision.

  6. Aaron says:

    This is an excellent point. While many can live off the interest in their investments (if the pile is high enough) – passive income streams can keep growing and growing and supply a lot of your income well into retirement. We love this idea!

    • David says:

      Thanks Aaron! Even interest from your investments is passive income 🙂 Most portfolios can safely generate about 4% with a combination of savings accounts/CDs, high-grade corporate bonds, high-yield bonds (junk bonds), and a stock portfolio.

      The real power is when you re-invest your passive income. If you re-invest and grow your passive income by 10% per year, you’ll double passive income ever 7 years.

  7. AdventureRich says:

    Yes yes yes! While we track Net Worth in order to measure our progress and keep motivated, we know that our Net Worth means nothing if there is not an income stream (or several!) to fund our life. Thank you for sharing!

  8. Definitely a fan of passive income in this same sense as a primary goal. The thought of doing a ton of post-retirement work to make additional funds only sounds exciting to me if it’s optional.

    One additional metric that could be interesting is: “What part of your post-retirement income do you want to be passive vs active?” With active including anything from real-estate to blogging, to other services. Some people may argue these are all passive, which is true to a point – but with diminishing returns if they’re neglected.

    • David says:

      That’s a great idea! You’re describing the middle ground of achieving FI, but working more until RE. You might have an income goal of $60,000 and decide to be FI when your passive income is $40,000 per year, plus you can work a simple job paying $20,000 per year.

  9. LadyFIRE says:

    So true. My net worth is either $80,000, or $250,000. One of the numbers is much nicer to look at, but the other one matters more because it actually reflects how much passive income I can expect

  10. Malik says:

    FATFIRE is the way to go R/FATFIRE

    • David says:

      For people who can actually reach fatFIRE, go for it! But each person’s definition is different. I consider fatFIRE > $100,000 per year in passive income. That puts you at the 90th income percentile.

  11. Pia says:

    Passive income forever. It has been the dream for me even before I knew what FIRE was. The more I worked, the more businesses I opened and shut down (my side hustles), the more I realised I wanted majority of my income to be passive. For my money to work for money, not for me to work tirelessly for every dollar because what happens when I stop working? The dollars stop coming in. That is indeed the dream!

  12. Think there are two schools of thought on retirement. If you are looking at it from a net worth perspective, you should only factor in your investments or available cash. Since you will be living off of drawing from the principle of these accounts not only of the passive income they produce. Or you can retire on passive income alone and never have to touch principle. That is the dream for most anyway but both ways can potentially work depending on each person’s individual situation. I agree, passive income is the way to go!

    • David says:

      I would argue that the first school of thought is just a specific instance of the second. In your first scenario, you only look at components of your net worth that provide some type of income, either passive or drawing down principle. This is pretty similar to the second scenario where you have multiple passive income streams.

      I think you’re hitting at the crux of the argument, which is that a high net worth doesn’t necessarily mean you can retire. You can own a gorgeous $1 million home with no mortgage, but have no passive income, so you can’t retire.

  13. Amy White says:

    You nailed it with this post. Net worth is meaningless unless you have income to live on. I know a lot of people who are wealthy on paper, but if they wanted to retire would need to sell everything to have income.

    I personally want passive income, particularly as I near retirement. Being able to make money based on wise investment decisions is really the way to financial peace. My goal is to have multiple passive income streams that will provide security as I retire (hopefully sooner, rather than later).

    Good luck with your passive income streams!

  14. Going back and forth but overall on the same page with you. I like tracking my net worth because it gives me the big picture in terms of savings (am I saving enough), investing and debt reduction. I do; however, like tracking my passive income because, as mentioned, it represents my reality aside from paper assets. Great post my friend!

  15. zeejaythorne says:

    This is why I want a small condo and won’t include it as an asset. I need to live somewhere, but don’t want my money wrapped up in something that produces no income.

    My current plan is for $36-45k in passive income. I hope I need less than this once I’ve paid off my debts, but I don’t want to leave myself feeling like I don’t have enough options.

    • David says:

      Honestly I personally think its important to reach your FI number and then hang out and still work for awhile, at least a year or so. That way you can practice living on your passive income, and also increase the passive income just in case.

      • zeejaythorne says:

        Oh definitely! I don’t want to go with a bare minimum life. That extra year or so will give you a much better idea of what things feel like, and another year for the market to take care of things. If I ever cut the cord and truly retired, I would want a sizable pot of liquid cash. I want that safety net.

  16. Miss Balance says:

    There are lots of arguments as to why you shouldn’t include your home in your net worth and this is certainly one of them.
    Most Aussie FI/RE bloggers I’ve spoken to don’t include their home and also don’t include their Super (our retirement funds) because you can’t access them until a certain age so it won’t help you RE.
    I’d be very happy with 40k passive income. Gotta keep working on that

    • David says:

      $40k in passive income would be great! When I buy a home, I’ll include it in my overall net worth, but it won’t be part of the calculation that determines FIRE.

  17. dividendgeek says:

    In a sense net worth + choice of investments (which impacts income) is important. I could invest all my monies into a 10% yielding MLP or REIT. I might be generating sufficient income … but my net worth my drop down (poor investment choices).

    • David says:

      Net worth and passive income are inherently related. Like you said, you can dump your entire net worth into a high yield fund, junk bonds, etc and make great income, but your portfolio risk will skyrocket. Likewise, you can dump your NW into an online savings account and make 1.2%, and if that’s enough to live on great!

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