What is your definition of Rich?
Aaron Tang of Mr Stingy asked this question on social media the other day and many submitted their answers.
I’ll leave it to him to compile in an article (hehe) but my answer was: the ability to make RM10000 per month through active or passive income (adjusted to inflation), plus free time to invest in health, family, relationship and passion projects.
I would like to thank @_AfzalKhan95 for asking this follow-up question, which became the prompt and inspiration behind this article: How does one get RM10000 per month in passive income, without being (outright or borderline) unethical and/or lucky?
In theory, the steps and maths behind it are straightforward. So here goes:
How to get RM10,000 per Month in Passive Income in Just 3 Steps
Simplistically, there are only 3 steps to it.
- Step 1: Work until you earn RM2.4 million
- Step 2: Put it somewhere that gives you 5% annually
- Step 3: Collect RM10,000 per month in passive income
Let’s expand those steps:
Step 1: Work until you earn RM2.4 million
Alas, unless you are lucky (generational wealth, windfall money, lucky capital gains etc), Step 1 is the hardest. You need to accumulate RM2.4 million in assets, after eliminating/deducting debt.
There is no way around it – you have to work to earn the amount. You can invest and use leveraging strategies, sure, but that only speeds up the wealth accumulation process, not start it.
(I had to say that because many people ask me how to be rich with just investing, without earning. Cannot, you need the initial capital. ‘Just’ 5% return on investment with RM5000 capital is RM250, much higher than RM20 you’ll get from 20% return on investment on RM100 capital.)
The good news is there are many ways to accomplish Step 1, as nicely illustrated by iMoney.my below:
Some of you might be intimidated by the RM2.4 million number. It’s big, yes. So what are you going to do about it? No, really, think of how to get there, fight the ‘I’ll never reach there’ thoughts, if you have them.
If you don’t know what to do, I suggest starting from these two resources on earning money in Malaysia:
- Increase your salary through day job (Saver+Investor; Climb the corporate ladder)– http://ringgitohringgit.com/earning-money/high-salary-in-malaysia/
- Increase your income through side hustles (Be the expert/star in your field; Be the entrepreneur) – http://ringgitohringgit.com/earning-money/side-income-malaysia/
Breaking it down into numbers and timeline, just to give you a rough idea of what Step 1 entails:
- It’ll take 30 years to reach ~RM2.38 mil if you set aside RM1600 per month in an investment giving 8% interest rate, compounded monthly (play around with this Compound Interest Calculator Malaysia)
- It’ll take selling 2,400 items/services and average profit margin of RM1000 each to earn RM2.4 million
Before we move to the next step, I just want to highlight something – I know you want to accumulate money as fast as possible. It’s not impossible of course, but I just want you to be very realistic – most people take years, decades even, and that’s okay. What’s more important is for you to enjoy the journey.
Step 2: Put it somewhere that gives you 5% annually
If you reached here, congrats! It’s not easy, especially for those from less-privileged backgrounds. Proud of you, good job 🙂
After you have completed Step 1, you now have the option of shifting into wealth preservation mode. (Or if you decide you want more than RM10000 per month, you can continue to accumulate more than RM2.4 million, up to you.)
What is the best investment for monthly income in Malaysia? Truthfully, finding an investment that gives you 5% profit per annum which allows monthly/yearly payout is not a hard task. You could:
- Do your own research – there are ~15 investment options you choose from as an individual investor in Malaysia (ASNB funds and/or roboadvisors are great for DIY investors)
- Talk to your Relationship Officers and/or Wealth Managers at banks and investment companies. They will be ecstatic to help you
- Talk to financial planners – highly recommended – more on this further below.
There might be some among you who are like, eleh 5% je per annum? I can do better hoho hehe.
Go learn the difference between growing wealth and preserving wealth. They are different strategies, but of course you clever already, what do I know kan.
Step 3: Collect RM10,000 per month in passive income
This is the easiest and most fun part of all – collecting the RM10000 per month. The RM10000 collected monthly is pure profit from interest, without touching the RM2.4 million capital.
Calculation-wise, to make it clear:
- RM2,400,000 x 5% per year = RM120,000 in profit from interest per year
- Therefore, RM120,000 per year allows you to withdraw RM10000 per month in passive income without reducing your initial RM2.4 million capital
- Note: This is a highly simplified calculation, not factoring in inflation etc. If you want exact exact number, use these formulas and calculate yourself (or see optional step, below)
In financial planning-speak, this is one type of retirement planning method, called the Capital Intact Method. Basically, you plan it so that even with the withdrawals, the amount of your initial capital won’t reduce, forever.
Capital Intact Method is the safest retirement planning method, and save for truly unexpected situations that insurance/preventative methods can’t cover, will significantly reduce the likelihood of you running out of money in old age (a huge fear for many!).
Optional but Recommended Step: Talk to a Financial Planner
You can DIY your money management all the way, but I highly recommend talking to a financial planner at some point, even as early as Step 1.
The thing is, personal finance *is* simple, BUT there are simply too many things to know. Even if you’re doing it ‘right’, the assurance that you’re doing it right itself is valuable.
It is rare though for someone to do EVERYthing right – something will slip through, so that’s where the financial planner comes in. For example, your financial planner could help you with:
- Estate planning – what happens to that RM2.4 million when your time is up? (Muslims please sort out your Wasiat/Hibah/Trust documents; the rest do Will Planning)
- Retirement planning (is the RM10000 per month actually enough for you to live your ideal life? What if there is shortfall?)
- Insurance and risk transfer (do you have enough insurance? Paying for too much? Are there exclusions you were not aware of?)
- Investment recommendations
- Education planning if you have children
- Inflation calculation
- Lifestyle adjustment
- Your options if you *can’t* ever reach Step 2 (not everyone can, but you can still live a happy and dignified life with smaller amounts of money)
- And more
Suraya, isn’t this FI/RE?
By this point, some of you might be like, hey this is familiar, isn’t this the whole FI/RE thing, the Financial Independence, Retire Early thing?
To be fair, it is, kind of. But what happened here is I put a number on it (RM10000 per month), rather than the goal of ‘I want a lot of money’. Also, I am meh about the ‘Retire Early’ philosophy of FI/RE community. I don’t.. hate my job..
However, if you are into the early retirement part, then I recommend reading this evergreen Mr Money Moustache article: The Shockingly Simple Math Behind Early Retirement
Remember you are free to adjust the numbers – if you have a big family or desire a luxury lifestyle, then adjust it to RM20000 per month or RM100000 per month or whatever. If you need less than that, perhaps RM3000 per month or RM5000 per month, adjust it. The same principles apply.
That’s all there is to it. Simple? Yes. Easy? No, but a worthy goal, if you want it to be.
Hope this article helps to break down the steps to the dream of ‘goyang kaki duit masuk’ fantasy that you may have. If you have tips or experience, would love to hear from you, please leave a comment below.
All the best and again, prioritise enjoying the journey, rather than fixated on the goal 🙂