How much of our total income should be passive income?

The importance of building assets along with the importance of passive income in our income profiles for us to be wealthy is evident. However, this leaves us with the question about the amount of contribution of passive income to our total level for it be considered a healthy situation. The answer to this question lies in our age and nothing else.


The book, The Millionaire Next Door: The Surprising Secrets of America's Wealthy has set a thumb rule that for an average accumulator of wealth, the net-worth of that individual should be one-tenth of the product of the individuals age and total pre-tax income. 

The formula for calculating the net-worth of an average accumulator of wealth is logically extended by assuming that the individual earns a return of 10% per annum on the net-worth. On the basis of the rate of return, the passive income for the can be easily calculated. Once we have the passive income we can easily arrive at the contribution of passive income to the total income as per the calculations given below. 

Contribution of passive income to total income

For a person with healthy personal finances, the percentage contribution of passive income to total income should equal to the individuals age.

If one changes the rate of return one can earn on the net-worth, the contribution of passive income to total income could become less than your age. However, irrespective of returns earned on net-worth, in a healthy personal finance scenario the contribution of passive income to total income is proportional to your age.