Passive Income

$1 of passive income is worth $30

Passive income is worth more than regular income for many different reasons. You’ll find plenty of quotes on the internet saying things like “a dollar is not a dollar” or “passive income is worth x10 active income”, all of which come to illustrate how much people who understand passive income like it, and with good reason.

But how much is passive income really worth? A dollar is not a dollar, ok, but how much is a dollar worth then?

Is passive income worth more than regular income?

The first question one might ask is, is passive income worth more than regular income? How could that possibly be? The answer is both yes and no.

Passive income isn’t worth more than any other income in the sense that $1 of passive income will not buy you more than any other $1 at the grocery shop. The cashier doesn’t really care how you made your money, just that you have enough to pay for what you want to buy.

So far a dollar is still a dollar, so how is passive income more valuable than regular income? Passive income comes with benefits. Just like a 60K with good benefits can be better than a 60K salary full stop, every dollar of passive income comes with a bunch of benefits.

The subjective value of passive income

People often try to explain the beauty of passive income from an emotional point of view. Passive income is the path to financial freedom, and so it seems fair to ask questions such as; what would you do if you didn’t have to work anymore? How would it feel to spend the cold winters drinking cocktails on a sunny beach? What would you give to be able to spend more time with the people you love?

Those are all great things that come with passive income. They certainly make it more valuable than regular income, which is directly related to you spending X amount of hours doing some kind of work, but these aren’t things you can’t measure, they don’t answer the question “how much is passive income really worth?”.

If you like numbers like I do all these reasons, even though appealing, might still not satisfy you when it comes to valuing passive income.

The objective value of passive income

In order to objectively assign passive income a value on top of the money itself you should look at it through the eyes of an investor.

An investor looks for opportunities to put his/her money to work in the hopes of getting it back with interests after a certain period or earn dividends on that capital on a regular basis. Investments usually some with some degree of risk, with some options such as savings account being completely risk free. The lower the risk the lower return an investor can expect from their investment.

This this in mind, imagine you managed to generate $10K in passive income per year. As an investor, how much money would you need to generate that kind of return? It will depend on the risk involved in the investment, sure, but let’s take a look at the averages associated with some of the most common investments.

Savings account 2% $500K
Stocks 8% $125K
Peer-to-peer 10% $100K

So you if you managed create a source of passive income that generates $10K per year you basically got yourself an asset worth anywhere between 100K (if you think the risk of the source of passive income drying out is high) and $500K (if you think the source of passive income will continue to generate revenue for many years).

Now we just need to take these numbers and do some simple math to be able to comfortably say that $1 of passive income is actually worth between $10 and $50 (or $30 on average).