Out of curiosity, today I did a rough calculation how much investment capital one would need to generate a return of $2,000 per month.
Depending on the type of investment, returns can range from 2% to 5% or more. For my calculation purpose, I assumed four investments invested in stocks and all gave a return of 4%.
And below is what I’ve found.
| Investment Amount | Return / year (%) | Return / month ($) |
|---|---|---|
| $150,000 | 4% | $500 |
| $150,000 | 4% | $500 |
| $150,000 | 4% | $500 |
| $150,000 | 4% | $500 |
One would need an investment capital of $600,000 to generate $2,000 per month at a return of 4%.
In my opinion, $600,000 is a lot of money to come up with. It’s almost equivalent to paying in full for a resale HDB! One that we take 30 years to repay if we choose to take up a loan. In another words, 30 years to save up to this amount for investment.
For some, they do have this amount of money “invested” in one of instruments that gives the least return.
| Investment Amount | Return / year (%) | Return / month ($) |
|---|---|---|
| $150,000 | 1% | $125 |
| $150,000 | 1% | $125 |
| $150,000 | 1% | $125 |
| $150,000 | 1% | $125 |
Yes, those with money safely in the bank gets $500 per month as compared to my earlier scenario. I’m being very generous with 1% return here. For people who do not have this amount of money in the bank, the interest would definitely be much lower.
Next, I decided to play around with different figures just to see how much difference decreasing or increasing the rate of return will achieve.
And I got the following.
| Investment Amount | Return / year (%) | Return / month ($) |
|---|---|---|
| $150,000 | 3% | $375 |
| $150,000 | 5% | $625 |
| $150,000 | 8% | $1000 |
| $150,000 | 12% | $1500 |
*Note: To generate a higher rate of return, I decided to shift 2 investments out from stocks and invest them into a riskier instruments giving a higher rate of return, a typical scenario. And it’s also possible to find investments generating 8-12% returns.
For the same $600,000 initial capital investment, the returns are now $3,500 instead of $2,000.
Now, let’s assume that I didn’t have $600,000 but would still like to achieve $2,000 returns per month. Naturally, I will have to invest them in instruments that give me higher returns. Using the returns from the scenario, let’s see how much investment capital I would need now.
| Investment Amount | Return / year (%) | Return / month ($) |
|---|---|---|
| $100,000 | 3% | $250 |
| $100,000 | 5% | $416 |
| $100,000 | 8% | $666 |
| $100,000 | 12% | $1000 |
Now, I would need $400,000 to generate a return of about $2,300. That’s $200,000 lesser or 10 years equivalent of my savings time!
This is how much difference a change in the rate of return can do for your portfolio.
However, before you jump into investing in riskier instruments with higher returns, careful considerations should be exercised. Factors such as financial goals, investment timeline, risk appetite, purpose need to be considered.
Like credit cards, I believe investments have to fit one’s lifestyle and aligned to one’s financial goals as well. They also have to be reviewed regularly to ensure that we are still on track.
For example, if one is of age 60, taking higher risks with the capital or retirement funds having the possibility of being eroded would probably not fit in the current lifestyle.
It also doesn’t matter that you don’t have $600,000 now. You can start with $600 or $6,000 and slowly build it up.
To share one of my favourite quotes –
Start with what you have, with what you can.
I’m still working on mine and hope this article has been useful.
Pingback: About Passive Income and Having Positive Cashflow