Reality-check a passive-income target

Income from investments or assets usually requires substantial capital, accepts risk or depends on ongoing work. Start by calculating the capital implied by the proposed yield.

High yield usually means higher risk

A larger advertised yield can reflect price volatility, credit risk, leverage, concentration or the possibility that payments will be reduced. Do not treat yield as guaranteed.

Separate income from total return

An asset can distribute cash while losing value. Evaluate both income and changes in principal, along with fees, taxes and inflation.

Test several scenarios

Calculate the required capital using a cautious yield, then test a lower distribution and an unexpected expense. A plan that only works under the most optimistic assumption is fragile.

Beware of “effort-free” claims

Rental property, online businesses and digital products can generate income but may require management, marketing, maintenance and capital replacement. Count that time and cost.

Educational information only. This is not investment, tax or financial advice and does not recommend any asset.