Welcome to

Private-Income-Group

 

This page is divided into 2 sections. The Section 1 explains how you can achieve financial freedom and early retirement. Section 2 explains the actions that you can take to achieve financial freedom.

 

 

SECTION 1
If you desire to retire young then you need to understand this formula. The equation and explanation are listed below. The reason why I start off with this equation first is so that by the end of section 1, you will be able to clearly see what your goals and objectives are.

 

TOTAL ANNUAL PASSIVE INCOME    = X,  where X can be equal 1, less than 1, or more than 1
TOTAL ANNUAL EXPENDITURE
 


A) What is Total Annual Passive Income (TAPI)?

  1. Passive income  simply means "income generated from minimal work from your investments". Examples of passive income are interests, dividends, and real estate rentals.

  2. Everyone of us have at least 1 source of income. The most common being employment source. This is known as employment income. Other types of sources include investment source (ie. Dividends, rentals), business source (business income), royalties, (check tax book)

  3. How much income can you generate in 1 year from all your sources of income? If tomorrow you stop working, then how much can you still generate? This is your TAPI.

Example : John Doe has the following sources of income in 1 year

  1. Employment = $80,000
  2. Rental income = $20,000
  3. Dividends from shares = $3,000
  4. Freelance jobs = $12,000

John Doe's Total Income is $80,000 + $20,000 + $3,000 + $12,000 = $115,000

If John Doe decides to stop working altogether, his income will be $20,000 (rental) + $3,000 (dividends) = $23,000. This $23,000 is called TAPI.

 

B) What is Total Annual Expenditure (TAE)?

TAE is the amount of expenditure or money that you have to spend to maintain the lifestyle that you desire. The more luxurious your lifestyle is, the higher is your TAE.
Example : John Doe has the following expenditure in 1 year.

  1. House mortage = $6,000

  2. Essentials (eg. food, clothing, utilities) = $25,000

  3. Entertainment (eg. music, holiday, games) = $10,000

John Doe's TAE is $6,000 + $25,000 + $10,000 = $43,000.

From the example above. John Doe's  X ratio is 0.53
  TOTAL ANNUAL PASSIVE INCOME (TAPI)  = $23,000 =  0.53  
  TOTAL ANNUAL EXPENDITURE (TAE) $43,000

What does this X ratio mean?

IF X = 1 : This means that if John Doe stops working, his passive income will just nicely cover all his spendings and maintain his current lifestyle.

IF X less than 1 : This means that if John Doe stops working, his passive income will not be able to cover all his spendings. He will need to look for ways to increase his income or lower his current lifestyle spending.

IF X is more than 1 : This means that if John Doe stops working, his passive income will be more than able to cover all his spendings. He can increase his standard of living if he likes.

From the example above, John Doe's X = 0.53 (which is less than 1). His passive income will not be able to cover all his spendings. He will need to look for ways to increase his income or lower his current lifestyle spending.

Using the same example of John Doe above. One month later, his parents passed away and he inherited a real estate property that can give him an annual rental income of $28,000. Now his TAPI = $20,000 (rental 1) + $3,000 (dividends) + $25,000 = $48,000. Now his X = $48,000 / $43,000 = 1.11 (more than 1).

This means that his passive income from rental and dividends are able to support his current standard of living even if he stops working.

 

Clearly your objective should have an X ratio of more than 1. The higher the X ratio, the better you will be. And to do this, you will need to increase your passive income and/or lower your expenditure.

You have learned the most important formula or equation after college. Now go to Section 2 and learn how to increase your passive income.