Active Versus Passive: A Dollar Isn’t A Dollar

dollartrapI’ve discovered something really interesting over the years.

Whenย I first started out in the auto industry, I was so excited just to make some money. I still remember crossing $30,000 in one year and thinking how “rich” I was.

Now, don’t get me wrong, $30,000 is a lot of money, even for an entire year of work. For perspective, that puts you in the top 1.23% in the worldย in terms of annual income.

So that’s just a lot of money to earn in one year. I worked incredibly hard for that money, pulling down many 50-hour workweeks. I remember working until 9:00 at night on Mondays – after starting the workday at 7:30 a.m. Nothing like getting home at 9:45 or so, eating a quick bite, taking a shower, and going to bed. Ahh, the American Dream.

While I was appreciative of the income, I also knew there was no way I wanted to keep doing that for decades on end.

And that kind of brings me to what this article is all about.

Work Smarter, Not Harder

There’s a major difference between active income and passive income: effort.

We already know what passive income is. It’s any income you don’t actively work for. Dividend income is of course my favorite flavor, but income you earn from a bank account, credit card rewards, royalties, licensing, and fixed income is all passive income. Rental income could even be included as well, though I’d argue that involves a bit more hands-on work than the rest.

Passive income doesn’t care how hard of a worker you are. It just flows your way, like a river to the sea. Now, you have to work hard – incredibly hard – to build up a passive income stream in the first place, but once that stream is flowing, it’ll likely continue to flow. Basically, you do the work once and potentially collect for the rest of your life.

That’s very different from active income.

If you have a job of any sort, you’re earning active income.

Active income is great. It provides the cash that you can turn into cash flow – converting active income into passive income, slowly but surely. But you have to work for it. Constantly. If you stop showing up to work, guess what else stops showing up?

You guessed it: your paycheck. Your active income.

Working hard is admirable. But make sure you turn that hard work into smart work. Turn those active dollars into passive dollars.

Taxation

You’d think that you’d somehow get punished for making “easy” money like dividend income. Like there would be this major drawback to just sitting on your butt and collecting money. But our economic system actually favors the investor class over the working class. As such,ย favorable taxation is just one more reason to work smarter, not harder.

I’ve discussed it before, but it bears repeating every once in a while.ย Qualified dividend income is wonderful from a tax perspective. If you’re within the 15% tax bracket or lower, qualified dividends are taxed at 0%.

Using tax year 2015’s tax bracket, you’re in the 15% tax bracket up to $37,450. So if you’re, say, a single filer, you can claim the standard deduction of $6,200, theย personal exemption of $3,950, and earn up to $47,600 in qualified dividend income and still pay a big fat zero come tax time.

Compare that to your paycheck and I think you’ll find yourself quite disappointed. Not only is the income not so favorable from a federal income tax perspective, but you’re also most likely going to be responsible for Social Security and Medicare taxes as well. So just go ahead and wipe out another 7.65% (assuming you’re not a doctor or lawyer) of your taxable income right there.

Active income or passive income? Hmm, tough choice.

A Dollar Isn’t A Dollar

I mentioned at the outset of the article that I’ve realized something over the years. And that something is that a dollar isn’t always a dollar.

My long-term goal for dividend income is $18,000 per year. So I hope to earn $18k in passive income by the time I’m 40 years old. That’s approximately what I think I’ll be spending at that point in time, but it’s obviously impossible to know for sure what I’ll be spending eight years from now. Nonetheless, that’s my target.

Now, some people might scoff at that. After all, it doesn’t sound like a lot of money. Let’s forget for a moment about all we’ve learned about happiness and how it just doesn’t take that much money to be happy. Let’s also forget that would put me in the top 5% of the world in terms of global annual income.

But $18,000 in passive income is a lot more than it sounds like.

And it’s certainly worth much more than its equivalent in active income.

First, we have the math to prove it. $18,000 in active income worth about $2,000 lessย than passive dividend income after you’re done with taxes (assuming you’re single).

Second, there’s no associated costs with the passive income. No lunches with co-workers, no uniforms, no dry cleaning, and no transportation costs to and from work.

Third, financial independence grants you geographical independence as well. You’re no longer tied to one particular spot. How much would you pay your employer (or give up) to work from home? To work from Spain? To work from the mountains in the summer and the beaches in the winter? To work from… anywhere? What’s the value in that?

Fourth, and more importantly, you don’t have to work for passive incomeย anymore once it’s flowing. The $941.85 in dividend income that hit my brokerage account last month came my way without one second of work on my part. I just woke up and – poof! – it was sitting there, waiting for me. It’s like the best magic trick of all. I feel like Houdini sometimes. Abracadabra. Money!

I continue to work, save, and invest so that I can keep addingย to that river of passive cash flow, but the river’s already flowing. No stopping it now. Even if I stop investing right now, it’ll continue to flow and eventually render me financially independent one day anyway. You can see that via my recent dividend growth update. Financial independence is coming whether I like it or not (I like it).

Think of it this way. If someone gave the choice of working at a jobby job for $30,000 per year in exchange for about 2,250 hours of your life annually or they promised you $18,000 in passive income that would increase at least in line with inflation for the rest of your life, which would you choose?

Exactly.

A dollar is not always a dollar.

And that’s because our time is the most valuable commodity of all.

Conclusion

I hope this article perhapsย offers some perspective when it comes to your different income sources. Passive dividend income isย truly more than it seems at first glance. There’s no objective and quantitative number that can be given, so it’s up to you to decide how you value your passive income. But I can tell you that I personally value every $1 in passive dividend income on par with at least $3 in active income. I can tell you for sure that I’d rather collect a buck for just waking up and being me than three dollars for busting my hump at pretty much any job a vocational counselor could come up with.

What do you think? Is a dollar not always a dollar? How do you value your dividend income?ย 

Thanks for reading.

Photo Credit: ratch0013/FreeDigitalPhotos.net

Edit: Corrected tax information and work hours.

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122 Comments

  1. Jason,
    I love my passive income! Nothing better than kicking back and watching the dividends roll in.
    Thanks,
    KeithX
    ps After researching rather extensively the other day, I added WPC to the portfolio. The articles written by you and Brad Thomas were a huge help. ๐Ÿ˜‰

  2. Would be awesome if a blogger did a comparison chart of different ‘active income’ levels v ‘passive dividend type income’ using the tax brackets as you mentioned. We could all convert our current income mentally into an equivalent passive income and maybe find we need less than we think!

  3. DM, yes. The passive income dollar is definitely much better than the active income dollar if you consider the stress, time, commute hassle etc. It does take effort to build up, but once you have flow, it gets bigger every year.
    Div4son

  4. KeithX,

    Hey, glad to hear we’re fellow shareholders in WPC. Not too often you find that yield and DGR all in one package. ๐Ÿ™‚

    I hear you there on the passive income. Never much enjoyed my paycheck nearly as much as my dividend income. Maybe it had something to do with being tired all the time!

    Best regards.

  5. Steven,

    That would be pretty awesome. But I think it’d be just about impossible due to the fact that taxes can be so incredibly complicated and unique to people. Tough to generalize that stuff, which is part of the reason I don’t tackle tax subjects very often. However, I’ll gladly allow someone to take on that project if they’re up for it. ๐Ÿ™‚

    Don’t forget you’d have to add in all the costs associated with your job like lunches, laundry, gas, etc. You might not only find out you need a lot less than you think you do to get by, but you might also not be making as much as you think you do.

    Cheers!

  6. DM,

    Very cool – $18K i think is a great goal and as you said – goes a lot longer than $18K. $18k = no taxes being taken out. It is 100%. Heck you need to make over 10% of that working your butt off in a way and using those hours. I agree with you through and through – it also offers quite a bit of income to allow you the freedom to do and be what you want. Also – $1,500 per month has a nice ring to it. I hope to be over $1k/month in 3 years and I could see in 6 years to be closer to $1,500. Congrats and great article DM, talk soon.

    -Lanny

  7. Passive income dollars are wayyyyy better than active income dollars, thats for sure! Currently, my wife and I are still slaving away at our day jobs but slowly and surely, we are working our way farther and farther away from the 9-5… its truly a great feeling. I am projecting that in just 2-3 years our snowball will be rolling all on its own and we can kick back and watch it flow. Our goal is to have her be a stay at home mom while I work. We won’t be able to really save any money other than my 401K and company match so we are trying to accelerate our savings right now. If we are able to hit $10,000 per year in dividend income, I think that would put us in a great position for the future.

    Like KeithX said above, I think I might be making a purchase in WPC soon too. Thanks for the tip!

    Thanks for creating your blog and documenting your life. It is truly an inspiration!

    ADD

  8. Lanny,

    $1,500 does have a pretty nice ring to it. ๐Ÿ™‚

    I should be all done with the student loans by then, so that’ll free my budget up quite a bit. In addition, if I were to somehow not make any more active income at all (unlikely), my healthcare expenses would probably be fairly low. All in all, I think it’s a good target to shoot for.

    I’ll see you at the finish line!

    Best wishes.

  9. ADD,

    Thanks for the kind words. I’m just fortunate to have a great readership. The blog wouldn’t exist without the readers. ๐Ÿ™‚

    $10k sounds fantastic. Like I wrote about a while ago on the article about the spectrum of freedom, one doesn’t need to be completely financially independent via passive income to gain much of the available benefits. $10k would radically change your lives over there. Keep it up! Every day is a new opportunity.

    Best wishes.

  10. Spot on, Jason. I started to understand the pleasures of passive income when I began to look at DGI back in 2011. I didn’t take me long to realize that “hey, I get this money without setting my alarm clock at night.” Even better is that for my wife and I, it’s all generated in either a Roth or TIRA account. It’s a beautiful thing.

    Steve

  11. I’m early on in the journey of turning my active income into passive income, but it will be nice one day to have beers on the beach, knowing I’m making money from my passive income! Wouldn’t it be nice ๐Ÿ˜€
    Good luck in your journey too DM !

  12. DM,
    I like how you thought about the idea of writing the difference between passive and active income. Every time I look at my gross pay vs. my net pay, I get disgusted. State Tax, Federal Tax, Medicare, Social Security, Health Insurance, Dental Insurance, and 401K are all taking a big chunk out of my net pay. I have looked at states with no income tax and FL seems the most appealing at this point. I was thinking NH but they tax dividend income at 5% I think. Where to retire is definitely something I will have to look into at some point. Do you have a post about states that offer advantages for the financially independent?

  13. Remember that the Social Security and Medicare tax ranges from 7.65% to 8.55%, depending on your income. Since pensions and dividends aren’t taxed, that was a big part of the calculation when I decided that I could retire. Best raise that I’ve had in 20 years.

  14. I much prefer my dividend income over the job income. My money works 24 hours a day 7 days a week. At work, if are there an extra half an hour with no pay because of lunch. Very few places will pay you during lunch.

    From the 1 to the 15 of this month, I made over a couple hundred dividend income already. Gotta love it , especially a few years ago I zero passive income.

  15. DM,

    I hear you. That’s one reason I moved down to Florida back in 2009, which is something I’ve discussed at length (including the state income tax situation).

    I would, however, consider more than just taxes in terms of where you want to live. I chose Florida not just because of the lack of state income tax, but also because I figured it’d be easier to get by without a car (due to the warm climate), the beaches, palm trees, weather, and ability to take advantage of outdoor activities year round. I may not always live here, but it’s been awesome to save a little cash on the state income tax. ๐Ÿ™‚

    Cheers!

  16. KeithX,

    You just reminded me why I don’t discuss taxes all that often. ๐Ÿ™‚

    I edited that. I was actually just referring to the SS tax, but I can see how that was confusing. I went ahead and included the combined FICA tax (assuming a normal income).

    Cheers!

  17. IP,

    I’d much rather have my money work for me rather than the other way around. Money doesn’t get tired or sick. I’d rather just get out of the way and let it do its thing. ๐Ÿ™‚

    Thanks for dropping by!

    Best wishes.

  18. Definitely, passive income has a special zing about it, it works its own magic. $18K is a nice target. I see your writing is also getting more interesting by the day just like natural flow of green bucks ๐Ÿ™‚

    However, I think if you have got family and perhaps few kids, closer to $24K is more realistic target to shoot for.

    Keep it going!
    PIM

  19. PIM,

    Thanks for the kind words. I’ve got more than 650 posts live on the blog now, so it’s sometimes incredible that I still have that zest for writing. I’m also surprised that I continue to come up with fresh ideas. I hope that’ll continue for a while. ๐Ÿ™‚

    $24k is a great target as well. Obviously, everyone will have their own unique “number”. And that number might morph over time as well as life invariably changes.

    Cheers!

  20. So well written. I like how you concluded the article with the reference to “time” as the most valuable commodity in life. I could not agree more.

  21. Jason,

    Once again great article, but even if our dividend are passive income they still required some maintenance in the portfolio, evaluating the companies, passing the order to buy/sell so we have an active part in this process, it is not 100% free of ยจworkยจ.

    This year the companies in our portfolio has been pretty generous and we will hit a new milestone of having dividend income above $30k, see our dividend income page.

    Cheers,

    RA50

  22. These types of articles are great motivation for those seeking the path to financial freedom. I remember it was just last year that I was searching for anything on the strategy to wealth. Well clearly I have discovered it all depends on building multiple streams of passive income that continuously grow on their own. Also I am now part of the AAPL ownership club as of this past Monday with a 14 share purchase. It was great to see an additional piece added to my annual dividend pie chart even if it currently represents 5% at it’s current yield.

  23. Chris,

    Thank you. I really appreciate that. Glad you enjoyed the piece. ๐Ÿ™‚

    I agree in that time is worth far more than money. Can’t buy time, yet people give it away so freely. It’s unfortunate.

    Looks like this is your first time here. Hope you continue to stop by. I have a big announcement coming up in a few days.

    Cheers!

  24. RA50,

    Achieving financial independence – especially early in life – requires plenty of hard work. No doubt about that, which is why I highlighted that it takes a lot of work to turn active income into passive income. But if checking in on my money here and there to see how much dividend income is rolling my way is “work”… well, I’m a happy worker bee. ๐Ÿ™‚

    Congrats on the upcoming milestone. That’s huge! $30k in passive income. I’d equate that to $90k in active income. Awesome work!

    Best regards.

  25. Thorsten,

    I didn’t really see anything particularly concerning there. I agree in that companies definitely shouldn’t be thinking about the short term. I think he’s just saying that management teams shouldn’t bend to the wills of activists and remain focused on the long term. Sometimes the best use of cash is buying back shares; other times it’s not. Business doesn’t exist in a vacuum.

    That said, I’d never really be too concerned with what one guy – even as powerful as Fink – says. The business world is a lot bigger than one guy. I call these kinds of articles “noise”.

    Cheers!

  26. TDM,

    “These types of articles are great motivation for those seeking the path to financial freedom.”

    Thanks so much. That’s exactly why I write! ๐Ÿ™‚

    Glad to be a fellow shareholder with you there in Apple. I hear you on it being a small part of the pie, but all in due time. It’ll grow.

    Have a great weekend, but make sure to stop by early next week. I have a big announcement coming up.

    Best wishes.

  27. Gah, such a fantastic post!

    This pretty much sums up everything I feel like saying to people who scoff at the concept of financial independence or who look at me like I’m delusional when I try to explain what I’m aiming for. From now on, my response to such people’s remarks will simply consist of giving them the url to this post and calmly walking away ๐Ÿ˜›

    In the meantime, tomorrow is payday + Q1 bonus at work, which means I’ll go buy myself some new shiny stocks while most people around me will go treat themselves to some new shiny (read: useless) toys, effectively bringing me one step closer to passive income land while they stay chained to active income land.

    Awesome writing as usual, brother.

    Cheers!

  28. I think it’s so cool that you got almost $1,000 in dividend income. Way to go. $18,000 is good money especially if you don’t have debt. I don’t think it matters what # you’re aiming for, I think a lot of retirement advice is traditionally too focused on the nest egg #. As if it is some magical unicorn.

    The best advice I’ve read about this is from this book, “How to Retire the Cheapskate Way: The Ultimate Cheapskate’s Guide to a Better, Earlier, Happier Retirement by Jeff Yeager” on chapter 1, page 15, he advises you to write down *everything* you enjoy doing in life. He advises you take your time making this list, anyway once you do that, go back and put a dollar next to each item on the list that costs money to do.

    He even says to have fun with it and write down “dollar store cheap” and “Saks fifth avenue expensive” or develop your own system. Once you’re done doing that, that should tell you how much money you’re really going to need to retire. The guy that the author got the idea from retired at age 39 because he did this.

    Quite frankly this is the best retirement advice I have ever read in my entire life. And some people scoff at the high # that traditional financial advisers tell you to achieve because a lot of people think that this is just over-saving far more than you should. I read that book by this Canadian lady Dianne Nahirny, she retired at 36, she said in her book that a lot of retirement advisers don’t retire earlier than the rest of the population.

  29. I love passive income. Every dividend which comes in remembers me like a ringing cash box. At the beginning of my investing this was very seldom, but I was really happy every day when it happened to get one more dividend. The journey to FI is for me like climbing a mountain. The best on the concept is, that you get presents more and more often the longer you stick on it. Thats much more motivation for me than getting 10% more money from work. OK, I like my work and I have no problems to do this. But when I reach FI I certainly will change a lot in the future. So you are absolutly right that passive income is much more valuable than active income.

  30. Great post, thank you. I love this, so refreshing in a world of buy buy buy. Go out and buy some dividend paying equity and reap the rewards of your hard work in the long term. Refreshing read, thanks.

  31. I think the tax benefit is one of the least mentioned yet most important benefits to pulling in your income so late from passive methods . I believe the number you can earn from dividends and still pay zero federal income taxed for a couple is north of $80,000 ! That is an obscene amount of money to pull in from dividends in any year alone , but it sure makes for a good lifetime goal!

  32. I definitely agree that a dollar is not always a dollar. A dollar in gross pay I get from my job is no the same dollar sitting in my brokerage account or checking account, as one is pre-tax and one is post-tax. I find it interesting that you love the tax advantages of dividends but don’t utilize a SEP IRA or traditional IRA. I’ve heard you discuss them before, but someone who only spends $18k a year could easily roll there IRA to a Roth without incurring any taxes, and use the money well before 59.5.

  33. I understand your strategy is to invest solely in dividend growth stocks. While I have incorporated dividend growth stocks as well, like a lot of people, I also have some mutual/index funds. How would you factor capital gains into your annual passive income (not getting into tax implications)? For example, if you in one year you earned $9,000 in dividends and $9,000 in capital gains from mutual funds (not selling individual stocks) would you consider that you had met your $18,000 goal, or would you want it based solely on dividend income?

  34. Jason,

    Great article as always. It’s a good reminder that even if we want to, we probably can’t work for ever, and having a passive income stream will be a necessity, not just a luxury.

    Andrew

  35. I’m sure this is a sore subject for some…but I love tax law! I went to school for it, and while I stay at home now it certainly has helped me discover how to become FI at an early age without paying tons of taxes or penalties ๐Ÿ™‚ Pretty sweet deal!! Keep up the good work!

  36. DM,

    Great summation of what passive income is and means in relation to active income. I appreciate it, and agree what starts as a trickle, turns into a stream, and eventually a river. Thanks for the post, sharing it with some non-DGI people so perhaps they see a little light.

    Happy Friday,
    Gremlin

  37. Hi Jason,

    I agree that a dollar of passive income is more valuable than active income. For me this works out to be about $1.33 : 1.00.

    I also give thought to the implicit earning power of a career. At age 30, making $50K a year it could be argued that that has the equivalent earning power of a $500K – $1M portfolio, based on using a 5-10% “yield” rate. I’d consider this to be higher than a 3% dividend yield since pay rises normally aren’t as strong as dividend raises and due to the limitations of how long people can or wish to work. I do acknowledge that you didn’t enjoy your work, but if you could leverage your skills into another career you did enjoy (and preferably for more money) the analogy would still apply.

    What do you think of this line of thinking? Technically you are doing what you love and earning from that in addition to your passive income coming in, so you could imagine the earning power of this work is equivalent to a healthy portfolio.

    I’m not missing the point of the article, which is basically opposite what I just mentioned, but was encouraging some constructive debate since I was kicking this type of calculation in my mind.

    Cheers,

    Mike

  38. Certainly an important point. Less effort will always be better than more effort when it comes to growing my capital.

    Interesting, I just reviewed a statement from one of my brokerage accounts, and it showed that total returns for the last 12 months through today was ~9k, almost split evenly between “market gain/loss” and “income”. If I go back further to the last 36 months, the total is ~25k with 15/10 from market gains/income.

    Everything to me is really part of the total return picture, but the flexibility to reinvest does have some value to me, and interestingly income has been a large part of my total return in the past few years. Even more interesting is the fact that some of those income returns surely juiced the market gains due to how I’ve started to reinvest from a heavy income portfolio into more moderate/balanced stocks and also into some growth stocks as well.

    In the lifetime of this journey, where the first 3 yrs seem to have gone by very quickly, patience and discipline are probably the hardest things for me to continue to do. 10k in a few years will certainly be a happy milestone to cross!

  39. Every day the market goes down (like today), I make it a point to visit your site to remind me of the real reason I am in the market- passive income!!! I then realize that the dividends are still rolling in even though the market hiccups!!

    Thanks for your motivation!!!

  40. ZTZ,

    Haha. I appreciate that. I’ll do my best to show them the light. ๐Ÿ™‚

    Have fun with the shopping spree. The stock market is my favorite store, and high-quality dividend growth stocks are my favorite kind of merchandise.

    Thanks for dropping by. Have a great weekend!

    Best wishes.

  41. Lila,

    Yeah, a lot of financial advisors come up with numbers for people based on a percentage of their income. Instead they should be using someone’s expected expenses. Funny how that industry really hasn’t come around to reality for a lot of people. And that’s unfortunate, because a lot of people think they need millions to retire comfortably. Unless they’re spending a ton of money, it’s just not true. And I’ve read a lot of studies that show people actually spend less as they age, not more. Healthcare remains the big variable, however.

    I’ve heard good things about that book. Haven’t read it yet, though. Maybe I’ll have to take a look. I definitely like his idea of writing down what you really enjoy in life. That’s something I’ve kind of talked about before too – instead of identifying yourself via your job, you should identify yourself through your passions/hobbies in life.

    Thanks for stopping by. Make sure to come by early next week. I have a big announcement.

    Have a great weekend!

    Best regards.

  42. olli,

    “The journey to FI is for me like climbing a mountain.”

    Couldn’t agree more. I say that all the time to people. And not to intimidate them, but to show them that it’s just a challenge to overcome. I was once staring that thing down from the very bottom. But I’ve climbed my way up to base camp or so. And I’ll be standing at the summit here within a few years or so. Can’t wait to see what the view looks like. And I plan to share that vision. ๐Ÿ™‚

    Thanks for dropping by!

    Best regards.

  43. chris,

    Absolutely. What merchandise is better than high-quality dividend growth stocks? They actually pay you to own them. Can’t say the same for anything that your local mall sells. ๐Ÿ™‚

    Cheers!

  44. Brian,

    Yeah, it’s really amazing. The system definitely favors the investor over the worker. And that’s why I’m moving away from the working class and toward the investor class. The grass really is greener… ๐Ÿ™‚

    Best regards!

  45. Sensim,

    Thanks so much. Glad you enjoyed it. I’ve got so many ideas, but it’s tough to find the time to write it all down.

    Have a great weekend!

    Cheers.

  46. FF,

    Yeah, I’ve discussed before why I prefer to use taxable accounts only.

    But what’s really amazing is that I’m on pace to achieve FI by 40 years old even with the following:

    1. I’ve never (and still don’t) make a lot of money.

    2. I don’t have a college degree or any specialized formal financial education.

    3. I don’t use any tax-advantaged accounts.

    It’ll be great to show the world that you don’t actually need any of that via my real-life results with proof all along the way. ๐Ÿ™‚

    Cheers!

  47. Andrew,

    Agreed. Can’t work forever, though who would want to? Fortunately, we don’t have to. You just have to convert that active income into passive income. ๐Ÿ™‚

    Best regards.

  48. klinel01,

    Hey, that’s great. Using the system to your advantage. Sounds good to me!

    Every situation has benefits and drawbacks. Just gotta look at the benefits and figure out how to maximize them. ๐Ÿ™‚

    Cheers!

  49. Gremlin,

    Absolutely. It’s just like a drip in a bucket. Eventually, that thing is overflowing. Amazing things happen if you work hard and give it time.

    Have a great weekend over there!

    Cheers.

  50. Mike,

    Right. Your human capital is incredibly important and valuable. And the more you can leverage that as soon as possible, the faster you can turn that active income into passive income.

    That said, I don’t value them with that close of a ratio.

    For instance, I truly love writing. I really do. It’s a blessing to be able to write and inspire people. However, if you gave me two choices – assuming they were mutually exclusive – where one choice is $18k/year in passive income that would rise at least in line with inflation and the other choice is a salary of $50k/year writing for a living, I would absolutely pick the former. No doubt about it.

    But, yeah, dollar for dollar, a salary of $50k is equivalent to a portfolio of $1.4 million yielding 3.5%. But, again, I’d rather have the $500k portfolio throwing off $18k/year. That’s just me.

    Have a great weekend!

    Cheers.

  51. Ravi,

    Well, investing in high-quality dividend growth stocks will invariably lead to significant capital gains over time anyway. Those who argue for total returns or index investing seem to forget that most of the stocks I talk about and invest in generally perform at the level of the market or better over time anyway. After all, I’m basically just picking those companies in the market that are routinely so profitable that they have more cash than they can possibly use. Substantial wealth is just a really nice eventual side effect of investing in high-quality dividend growth stocks, on top of the significant growing cash flow. ๐Ÿ™‚

    Cheers!

  52. JM,

    Down days are my favorite. Just like a sale at your local grocery store. If you’re going to buy stocks anyway, then cheaper equity is a blessing. ๐Ÿ™‚

    Thanks for dropping by. Make sure you stop by early next week for a big announcement!

    Best regards.

  53. Hi Jason

    Great post, and what I think you are saying is that an active dollar is only a dollar, but a passive dollar is a dollar multiplied by the additional time it creates.

    Like you I would rather have the smaller amount of money but be able to take advantage of the time I don’t need to be chained to a desk to enjoy it, than more money by working.

    I have targeted less than half of my current salary to be able to live on when I am FI, and fully expect to be able to enjoy life a million times more due to the freedom to choose when I want to do things rather than squeezing everything into the weekend.

    Enjoy all your passive dollars
    FI UK

  54. DM,

    Great post, a very important topic that I feel is often overlooked by people of all generations. The power that passive income can have is amazing, it truly frees up your life and provides one with the opportunities to explore things they would have never thought of. Passive income is what lays the basis for pyramid schemes to get people to join, its great that their are other, more reliable sources of passive income such as DGI.

    Keep up the great work, you’re an inspiration!

    Best,
    Dividend Odyssey

  55. That’s right, not all income dollars are created equal. Dividend income has a huge tax advantage. In fact, I’m looking forward to doing taxes next year just so I can experience that advantage first hand. It feels great to be part of the investment class!

  56. FI UK,

    Absolutely. Time is absolutely our most precious commodity. And I’ve learned to really value it over the years.

    I think that my recent move to writing is a good example of that. I may make less now, but I have a lot more time, which is something that has increased my quality of life and happiness exponentially. ๐Ÿ™‚

    Thanks for stopping by. Enjoy your passive dollars as well!

    Best wishes.

  57. DO,

    Haha. Yeah, dividend growth investing is no pyramid scheme. If it were, I imagine I’d be earning a pretty good income from every person I’ve ever inspired to take up investing. Wouldn’t that be something? ๐Ÿ™‚

    Thanks so much for the support. Really appreciate it.

    Make sure to stop by early next week. I have something I’ve been working on and it’ll go live very soon.

    Have a great weekend!

    Cheers.

  58. Spoonman,

    That’s fantastic. You’re in the perfect spot over there. Doing your taxes becomes a lot less of a chore now! ๐Ÿ™‚

    Thanks for dropping by.

    Best regards.

  59. Jason, great post. This is a perfect example why I love dividend income so much. While bank interests are passive income, you get taxes at whatever your marginal tax rate is. Meanwhile, dividend income gets way better treatment when it comes to tax rate. That’s why when you calculate how much you need from dividend income to be financial independent, you shouldn’t look at your active income amount. Rather you should look at how much expenses you have and use that amount to calculate.

  60. Passive income also takes care of you during your darkest moments and doesn’t discard you “because you’ve outlived your usefulness” like a super villain offing his henchmen.

    What am I talking about? I met a member of my in-law’s family who worked construction but just got injured. He can’t work and is fighting for his worker’s comp. He is in his late 40’s or early 50’s, and I assume he’s been working for at least the last 30 years. 30 years of work and what happens the moment he can’t work? He can’t earn money and pay his bills.

    With active income, you are only as good as what you can produce tomorrow. But passive income takes care of you regardless of your skills, physical condition, or even desire to get up on the morning and wait for a bus at 7 in the morning.

    Remember that story about the girl who got fired from her job because she dressed up as a Boston Marathon victim at a house party? Say what you will about her taste in costumes and sense of humor, but I’d rather have not have to worry about whether or not I’ll have income tomorrow because of something I wore once at a friend’s house.

    Active income or passive income. Not even a second of hesitation there. I’ll take passive income anytime.

    Sincerely,
    ARB–Angry Retail Banker

  61. One of the most overlooked benefits of living entirely off of dividends down the road are the crazy tax savings. If you are a married couple and your only income is dividend income, you can make up to something like $80,000 and pay $0 in federal taxes (and social security / medicare).

    What a benefit to investing for the long term, so that in the future you can’ quit working for good, make no income and pay WAYYYYYY less in taxes while living extremely well.

  62. Jason,

    Are you sure that $18K is going to be enough? I went back thru several of your monthly expense reports at random, and I didn’t find any months where your expenses were below $1.5K, and many months where your expenses were well in excess of $2K. Rent and groceries alone are going to eat up half of your monthly budget at $18K annually. Maybe you should aim for more like $25K annually before you pull the plug and start living solely off your dividends.

    Take care,

    Jake

  63. Hi DM,

    Very interesting post. I love passive income, although currently our passive income comes mainly from rental properties – which, as you rightly mention in your article, is not 100% passive, since you still need to get involved from time to time. I have just started to build a dividend growth portfolio.

    Cheers!

  64. Sensei/Jason,
    Thank you for another thought provoking and inspiring article. The idea of tax free qualified dividend income as long as you stay in the 15% tax bracket is really intriguing. That would make a taxable dividend account similar to a Roth IRA, without the restrictions.
    I had to look up “qualified dividends”, so I am including a link that expands on what that means. http://www.dividend.com/dividend-education/qualified-vs-unqualified-dividends/
    I check on your blog most days, and I can’t wait until next week to see what the big announcement is.
    As for the pyramid scheme theme, if my gratitude were dollars you would be feeling richer by the week.
    Regards,
    Tom

  65. Definitely get where you’re coming from on “active income.” I work about 70 hours a week on average, and it can be a real grind.

    I’d love to reach the point where I have enough passive income to support myself, though I think I’m one of those people who will never really retire.

    Thanks for the article!

  66. Hi DM,
    I recently purchased OHI and i thought they had a healthy div yield of 5.67%. But to my horror i see that i am being pad just $0.18 this quarter. It should have been $0.72 right? Did they cut down?

  67. Getting rewarded for being an investor truly is something nice. For the same amount of money, I’d rather not deal with the headaches of work AND pay less taxes. Win-win for passive income.

  68. I wanna guess…you’re having a baby, you’re getting a part-time job, you’re moving to Portland or Chile, you got a book deal, you’re going to a finance conference or retreat? ๐Ÿ˜€

  69. Hi Jason,

    Great article, you are definitely on your way to at least $18,000 in dividend income by the time you are 40. The people that scoff at that probably don’t take into account that the $18,000 will most likely be over $70,000 by the time you are 60. Dividend growth is a wonderful thing.

  70. Greetings from sweden jason ๐Ÿ™‚
    Work with me here, i have an interesting thought.
    What if more and more people would start investing in stocks, to the point were no more people went to work cause everyone was collecting dividens from home? Yeah sure people in somalia would have it really tough getting that 18k in dividends but it is possible.

    Do you think in a foreseeable future that investing in stock no longer will be able. cause the top dont want the poor to be richer? Mindblowing. Would love to hear your opinion. (please disregard my bad english)

  71. Tawcan,

    Absolutely. The system favors the investor, especially those using qualified dividends and/or capital gains. It’s funny. You’d think that the system would somehow penalize those opting out of the system and earning passive income, but the system actually makes it easier to do just that. Gotta take advantage of that. ๐Ÿ™‚

    Have a great weekend!

    Cheers.

  72. ARB,

    Yep. Passive income doesn’t care about your character, work ethic, or abilities. It just doesn’t discriminate.

    There’s definitely going to be a day when I’m either unable to earn active income or uninterested in doing so. I have no idea when that day’s going to come, but you can bet I’ll be completely prepared for it. Like I’ve written about before, being financially independent doesn’t mean you have to stop working. FI and work aren’t mutually exclusive of one another. But you absolutely have to work if you don’t have enough passive income to cover yourself. Better to have that flexibility and freedom rather than be without out it. That’s really the bottom line. ๐Ÿ™‚

    Have a great weekend. Thanks for dropping by!

    Best wishes.

  73. Bryan,

    Definitely. Not only is it a situation where you work once and potentially collect forever, but the taxes are more favorable as well. I don’t know how anyone couldn’t want to at least have that option where they can work or not work. I may want to continue writing after the dividend income covers my lifestyle, but what and when I write will be completely up to me. That’s just awesome. ๐Ÿ™‚

    Have a great weekend!

    Take care.

  74. Jake,

    Well, you have to consider a few things there. The student loans will be gone, which knocks off about $220. The engagement ring is obviously temporary. In addition, healthcare could potentially be at least partially subsidized, depending on how things are at that point in time. And the blog also costs money, which I don’t factor into that. If the blog fails to earn its expenses at some point, then it would have to go (highly unlikely). And I now no longer have a car. All in all, I think I’ll be alright. However, I did mention that it’s impossible to tell exactly what I’ll be spending eight years from now. Life could bring about any number of surprises/changes.

    But just taking a look at my most recent three months of spending and I’ve averaged $2,204. That’s also including a laptop which crashed. Nonetheless, factor out $224 in student loan repayments and you’re down to $1,980. Take out the engagement ring and you’re down to $1,780. Take out the car expenses (even after factoring in for public transportation) and I’m down to like $1,700. If I were able to cut my healthcare costs in half, I’d be down to about $1,600. And there’s further room for improvement there as well. We’ll see how it goes, but I like my chances. ๐Ÿ™‚

    Cheers!

  75. independentbunny,

    Sounds like you’re in a good spot over there, though. If you can earn a good chunk of rental income to roll into dividend growth stocks, you’ll have your semi-passive income buying even more passive income. That’s called “having your money work for you”. ๐Ÿ™‚

    Thanks for dropping by!

    Best regards.

  76. Tom,

    Hey, gratitude definitely works for me. I absolutely feel richer every single day. You readers are really supportive and wonderful. I’m blessed to be part of the community. ๐Ÿ™‚

    Glad you were able to take something away from the post. I don’t discuss taxes all that often because everyone’s tax situation is fairly unique, but the favorable tax situation for dividend investors is something that bears repeating every once in a while.

    Thanks for stopping by. Have a great weekend over there!

    Best wishes.

  77. Professor,

    70 hours per week is crazy. I’m worn out just reading about your schedule. But you’re on the path, which is great.

    Most of what I talk about is really flexibility, freedom, and, options, One doesn’t need to stop working just because they have enough passive income to sustain their lifestyle. But having to work and wanting to work are very, very different. Plus, you just never know what tomorrow will bring. Nobody ever regretted having options or said “I just have too much money.” ๐Ÿ™‚

    Cheers!

  78. Lila,

    I think you know me better than some close friends and family! ๐Ÿ™‚

    “youโ€™re moving to Portland”

    My dream city. A real urban utopia, though the high taxes and slightly unfavorable weather are drawbacks. I may move there one day anyway, however.

    One of the things you listed is correct. I hope to make the announcement Sunday!

    Cheers.

  79. Lukaivan,

    Absolutely. That income will very, very likely grow much faster than inflation, increasing the spread between income and expenses. Eventually, I believe it’ll more than I can possibly spend. At that point, all decisions I make will be almost completely independent of money. I’m looking forward to watching that snowball roll faster than I can keep up with!

    Glad you get it. ๐Ÿ™‚

    Best wishes.

  80. Patrik,

    Well, that would never happen. The pragmatic side of me has a hard time imagining some world where nobody works. But just indulging the thought, I think a lot of people would still work at something even if they had enough dividend income to cover their bills. However, you’d see people doing different jobs – stuff they actually enjoy and find some kind of passion in. Keep in mind that not everyone shares the same passions. Now, some jobs would probably be just plain undesirable, and society would have to figure out a way to automate those jobs or otherwise fulfill that demand.

    But that wouldn’t make investing in stocks impossible. People still have to eat/drink, heat their homes, manage their money, have fun, and everything else. Some industries might change dramatically or whatever, but the free market would figure out the winners and losers.

    However, this is why I invest in companies that provide ubiquitous products/services that even frugal people use:

    https://www.dividendmantra.com/2013/10/investing-in-companies-that-sell/

    https://www.dividendmantra.com/2013/10/investing-in-companies-that-sell_13/

    Cheers!

  81. liveoffmydividends,

    I can tell we’re aiming for the same thing, based on your name. ๐Ÿ™‚

    However, I’m not aiming for $18k/month. I’m aiming for $18k/YEAR. I don’t think anyone would have a problem living off of $18k/month.

    Thanks for stopping by. Appreciate the kind words very much. I only hope to inspire others.

    Have a great weekend over there!

    Take care.

  82. DM, your strategy for early retirement in a taxable account does meet your goal, but Fervent’s argument for taking advantage of tax free accounts is valid for many of us. Especially if your employer is offering you a plan in a tax free account. I plan on using my employer matched 401k account for dividend income in the future, and bridge the gap when I have low income from dividend funds after I retire early to convert the 401k to a Roth with minimal penalties. Nothing is wrong with either approach, but it depends on your circumstances. I have combined balances of about 200K in my 401k and my DGI taxable account. I am adding more to my DGI account than my 401k, because that fits my immediate needs of early retirement, but I am darn sure I am not going to turn down the free money from employer match and tax advantages that are there on the other side. Everyone’s individual situation is different, but we all have the same goal. Keep on Keepin’ on!

  83. Daniel,

    Oh, absolutely. As I’ve argued many times now, my strategy regarding using taxable accounts solely isn’t necessarily recommended for many other people out there at all. I think the vast majority would be better off taking maximum advantage of the tax-advantaged accounts they’re offered. An employer match (something I was never offered) is especially attractive and basically free money.

    If I would have had more attractive 401(k) options (like a match) back in the day, I probably wouldn’t have passed that up. Nonetheless, it did create a unique situation where I’ll still be able to show what kind of success is possible on this kind of income and without using tax-advantaged accounts. I’m like a guinea pig, I suppose. Works for me! ๐Ÿ™‚

    Thanks for adding that. I want to point out I wasn’t speaking for everyone else, but rather just for my personal situation.

    Best wishes.

  84. As always, Jason, great post. Once I read a comparison between Americans and other nations and their work habits. And you nailed what the report actually said. Americans are like bulls going for their dreams and goals and willing to work for it hard. And by that I mean even smart work needs to be a hard work with persistence, willing to spend time, learn, improve, but also know how to rest and enjoy the life. You also work hard so you can stop as soon as possible and live a free life. I can see my friend who spends a whole spring and summer in Europe and returns back to the US only for winter to work (as he is a semi-retired). Wonderful life. And it takes a hard work and a smart work. If you work hard but you are still stupid it won’t get you anywhere. So, at first, you work hard and as time goes by, you ease up.

  85. KG,

    I’m personally not a big fan of any auto manufacturers. The competition is fierce, it’s a very expensive industry, and profitability is poor. That’s probably why it’s tough to get traction in terms of lengthy dividend growth streaks there.

    Cheers!

  86. Martin,

    Absolutely. You work hard for as long as it takes, but at some point you want to start working less hard and more smart. And that’s kind of what I did. I busted my butt in the auto industry until I felt like I could take that leap. Freedom exists on a spectrum. It’s definitely not all or nothing. ๐Ÿ™‚

    Thanks for dropping by. Hope you’re having a great weekend!

    Best regards.

  87. I know you did ๐Ÿ™‚ and it was a great kick for me a couple of years ago when I was looking for a strategy and found your blog. Although I trade options primarily I also invest in dividend growth stocks hard to mirror your steps (and others who follow this strategy). All my savings beyond 401k contributions and debt elimination go towards dividends and when I grow my options trading account large enough then all income from options will also go towards dividend paying stocks.

  88. Very nice article !!
    Over here dividends are totally tax free in the hands of the investor and LTCG is zero (LTCG = 1 year plus). But still there are very few investors as compared to traders. Some people , rather I would say the most, simply don’t get it.

  89. Great Article!
    Paying less SS tax because you don’t have an active income is great, but you also have to account for much less SS income in traditional retirement (not early FI). That is my dilemma when determining when I can quit my job. The earlier I start living on pass income, the more income I will need after age 65. By the way I turn 40 in a couple of weeks to put where I am at in my journey in perspective.

    Do you consider SS income into your equation or just leave it out completely?
    Peter

  90. Harsh,

    That’s a shame that there are so few people over there taking advantage of that favorable taxation. The benefits are there. But nobody’s going to force you to take advantage and grow your money. Hopefully, I can continue spreading the message for a while yet. ๐Ÿ™‚

    Cheers!

  91. Peter,

    Well, there’s a spectrum/sliding scale there with SS income. If you’re truly able to put yourself in the position to where the years that you’re not working are so significant that it’ll dramatically affect the output of your SS check, then you’re probably going to have so much passive income later in life that it won’t matter. However, if you’re in a position to where you have to continue to work until your early or late 50s because you didn’t start early enough, plan ahead, or otherwise put yourself in a comfortable position as it pertains to passive income and freedom, then your check should still be pretty large as it’s based on the earnings of your highest 35 years of earnings.

    I can tell you that I don’t really factor in SS income at all. There will certainly be some there for me, as I’ll have at least 15 years of income for which they can index. Keep in mind as well that, as I’ve mentioned before, it’s unlikely you’ll never earn another active income dollar for the rest of your life, even after you become financially independent. There will very likely be projects that you take on over time that are somehow able to be monetized. Thus, you’ll probably still pay in here and there and still collect something at the end. But, truly, if you’re able to “retire” in your early or mid-40s, then it’s very unlikely that you’ll actually need a healthy SS check anyway.

    Hope that helps!

    Best regards.

  92. I hope it is just noise. It is interesting that it is from the CEO of the largest fund out there. $4.6Trillion assets under management. Hopefully it won’t gain traction. It would be nice if someone else with greater clout (Buffet?) came out and disputed the premise.

  93. Ed,

    Well, I think he makes some points. I’m a big fan of buybacks and dividends, but only in the holistic sense of maximizing shareholder value. Sometimes buying back shares doesn’t make sense. Other times it’s the best way to use cash. Just really depends. But I do agree with him in the sense that there shouldn’t be short-term thinking. And sometimes the activists are aiming to maximize profit as quick as possible before moving on. As a long-term investor, I’m not particularly interested in that.

    Cheers!

  94. So many people in the personal finance world look at being a landlord as passive income…to which I say B….S….
    There is nothing passive about owning rental real estate and for me the headaches were keeping me up at night. I have been so blessed to have sold my properties. That money is now sitting in our brokerage accounts, invested in a variety of really great dividend paying stocks and interest paying bonds. All are highly rated, financially secure companies and I can now sleep at nights not worrying about tracking down a late payer or fixing up a unit trashed by the tenant. I don’t have to chase down the company to get my dividend. It drops into my account without fail, usually while I am cozy in bed sleeping.

  95. I came home from work one day when I was about 33 or so (way back when). My head was spinning and I was exhausted. I had in my hand a check for about $25,000.00 ( a bonus and my first taste of real money). After the urge to buy a Porsche or something else idiotic passed , I had an epiphany and it went like this: “I worked incredibly hard for that 25k and now that 25k is going to work incredibly hard for me”. Thus began my path to financial freedom. Starting with dividend stocks in my IRA and then venturing into income real estate, I have in 16 years turned that 25k check into about 1.3 million dollars in assets (which is nice, obviously) but what’s far nicer is the 70k net per year these assets throw off. It was not as simple as I’m making it sound, but I was, at 33, convinced that at 50 or so, I wanted a very substantial return on the time and money I invested (which I got) but, more importantly, I wanted TIME. Having time, or control over your time, is the ultimate wealth. If you focus on building passive income through wealth accumulation, you will sooner or later have the same success.

    Your blog is a great service to the concept of self-reliance and self-determination; you should be proud of your performance.

    Mike

  96. Kathy,

    Hallelujah. Couldn’t agree more! ๐Ÿ™‚

    Look, I think rental properties can be a great way to generate wealth and income. And I’d be willing to bet that the right investor can far outpace the average stock market returns (in terms of both gains and income). But it’s definitely not passive.

    I’ve noticed some people also refer to blogging/writing income as passive. I can say firsthand that’s also not passive. If I stop writing, I stop earning. Maybe I need to write a post on exactly what’s passive.

    Glad to hear you’re earning your income in a much less stressful manner these days. Dividend income is one of the few methods of earning passive income that can truly live up to the old clichรฉ of collecting a check while you relax at the beach.

    Thanks for dropping by!

    Best regards.

  97. Froogal Stoodent,

    Thanks! Really glad you enjoyed the article. I’ve got another article in mind that takes a similar look at financial independence. I hope to publish that in the next couple weeks. ๐Ÿ™‚

    Best wishes!

  98. Hi Jason, I come to your site often but I’ve never commented. I started my DGI about a year ago and couldn’t be more excited about the potential. I would have to say this is the best article I’ve read (which prompted me to comment.). I look forward to reading about your future success and will surely join you someday.

    Regards,
    Tim

  99. Tim,

    Hey, thanks for stopping by. Appreciate the readership! ๐Ÿ™‚

    Really glad you enjoyed the article. It was picked up by Lifehacker as well, so I guess others really liked it too. I’m so happy about that.

    Keep at it. You’ll be there before you know it.

    Cheers!

  100. I agree that an actively earned dollar fails in comparison to a passively earned dollar. I did the 2014 passive income total this year and was amazed to see how much it’s coming from the passive income bucket. Cheers to passive income and FI!

  101. Mr. Enchumbao,

    Cheers, indeed!

    An actively earned dollar is great. But a passively earned dollar is truly wonderful. The more you can turn the former into the latter, the better off you’ll be. ๐Ÿ™‚

    Best wishes.

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