The Ideal Split Between Passive Income And Active Income For A Better Life

A better life, three kids on boogie boards

Enjoying Life In Hawaii With Passive Income

Active income is much more enjoyable than passive income due to the positive feeling of purpose. We want to know our actions make a difference no matter how small the scale. So for those of you who fear retirement expediting your demise, don’t worry. Every able bodied retiree will naturally gravitate towards doing something useful to keep themselves healthy.

When my total income was dominated by active income I was thrilled but felt there was NO WAY OUT. The only way to flourish was to work hard and constantly stress about being the best to continue getting paid and promoted. I’m already quite disciplined, so to add high expectations from managers only compounded the one more year syndrome. It wasn’t until passive income hit about $3,000 a month in 2008 when I began to see the stars.

$3,000 a month wasn’t enough to live comfortably in my current house in San Francisco, but it felt good knowing I could survive on my own if absolutely necessary. Worst case scenario I’d sell my properties and rent a studio for $1,400 a month. With $700 a month left in disposable income after taxes, I’d wait it out until an opportunity came along.

Progress begets progress. Once I started thinking about the worst case scenario I became hooked on creating better worst case scenarios. I won’t be able to easily send more than one kid to private school in SF if need be, but my current worst case scenario is OK. Besides, I was told there is need-based scholarships for families who make less than $100,000 a year per child so that’s good! Fingers crossed for a studious and smart kid.

I’d like to quantify a framework of happiness between passive income and active income as a percent of total income. The goal is to provide motivational goals for those seeking financial independence. I’ll share with you some of my thoughts along the way so you get a sense of how the journey feels.


90%+ Active Income As a Percent Of Total Income: When you have more than 90% of your total income as active income it’s easy to feel like a slave to your job. Stop working and you starve, it’s as simple as that. Most people in America, if not the world are in this bucket where their job is their only source of income. The need for money and healthcare trumps one’s dissatisfaction for work. The trick is to increase your passive income to coincide with the decrease in the desire to work. It’s the same idea as paying off your mortgage completely by the time you retire.

I was in this stage for eight years after college (1999-2007) and it was fine because I was full of energy until 2009. But the 2009 downturn really beat my motivation to a pulp. If I was still trying to kill it during my 11th year of work without a reasonable passive income stream I’d be depressed because I would need to work another 10 years to get to financial freedom as a less enthusiastic worker bee.

60-89% Active Income: You’ve begun to taste the sweetness of passive income. You aren’t generating enough passive income to do whatever you want yet, but you know that if you stay the course for X amount more years, you’ll get there. To stay motivated, your passive income is earmarked to cover particular expenses such as vacation, food, clothing, or shelter. Once you find a purpose for your passive income, you gain more appreciation and motivation.

I was in this stage from 2008-20011, but instead of spending my passive income I just kept plowing the proceeds back into my investments. There was still a lot of anxiety because of the downturn so I felt the need to work as hard as ever. One motivational thought I kept on thinking was that every $10,000 dollars saved was like giving myself a $400 a year raise so I kept on going.

40-59% Active Income: You are now generating as much passive income as your active income. Thoughts are now dancing seriously in your head about whether you should quit your job and do everything your heart has been desiring all these years but couldn’t. Half of you take the leap of faith because you’ve been dreaming about this day ever since you started this passive income journey so many years ago. The other half of you stay at your job because suddenly, your job feels so much more fun without all the pressures to perform!

I probably would have continued working for another four years if it wasn’t for the fact I was able to negotiate a severance package which allowed me to walk away with deferred compensation, severance, and health care. I was never able to get passive income to equal 41-60% of my total income largely because of my day job income amount.

20-39% Active Income: With the majority of your income coming from passive sources, you’re only working because you find the job stimulating. You enjoy your co-workers and can’t see yourself doing anything else with the majority part of your day. You feel that your day job income is now bonus income because you can easily live off your passive income. The feeling of making “double money” is exhilarating. However, sooner or later your enthusiasm starts to fade. You begin to do some soul searching to find more purpose in life.

I wrote in 2013 that a part of me longed to go back to work in order to make “double income” now that the good times are back. I held off going back to work because I wanted to finish out the year with full dedication to entrepreneurship. Now I can say I gave entrepreneurship everything I had in 2013 and look back with no regrets.

<20% Active Income: There’s now really no need to work at all for a living. If you are working, you start feeling a little guilty about taking up a position that someone younger and hungrier would love to have. Doing something for money feels off. As a result, everything you do that provides compensation adds some value to society.

Given I no longer have a job, it’s much easier to have passive income dominate my total income stream. Based on reclassifying income in an online income contest, passive income was 80% of total income all throughout summer when I went traveling for six weeks. It felt great when I was distracted with travel, but once I returned home I longed to get active again. Now I’m considering part-time work to fill 25 hours of free time. I’m pretty confident that anybody in the 61%-100% passive income range will long to work again if they aren’t already.

Ideal Passive Income and Active Income Chart Split

Note: There’s somewhat of an illusion that day job income is completely active income. One’s day job income eventually starts feeling like passive income because we take our job income for granted. Day job workers make money over the weekends, holidays, and when sick. We tend to always get used to everything we have. Passive income can also be classified as semi-passive.


Consider leaving a job you dislike when your passive income produces enough to take care of you and your dependents or when your passive income equals 30% or more of your total income. Obviously the greater your total income, the less passive income percentage you will need to survive.

At 10% passive income as a percentage of total income, you’ve got your savings habits down pat, and you’ve also got room to grow your passive or semi-passive income streams if you dedicate your time. When I left Corporate America in 2012, my passive income was roughly 25%-30% of total income. The figure is on the low end of my chart, but I had the courage to make the move because of the severance and deferred compensation, as well as having a clear idea of what I wanted to do.

If I were to go back to working in finance now I should be able to achieve a roughly 50/50 passive/active income split which I think would make me feel ecstatic coming into work every day. Each paycheck would feel like winning a small lottery. But instead of going back to work in finance, I’ve decided to try my hand at something new!

Financial Samurai Passive Income Portfolio 2016

Latest Passive Income Streams

Recommendation For Building Wealth

* Manage Your Finances In One Place: The more passive income streams the more you have to keep track. I aggregate all 32 of my accounts with Personal Capital so I can easily stay on top of my finances. Not only is it free, Personal Capital tracks my net worth automatically, allows me to manage my cash flow month-to-month, and has a fantastic Investment Checkup tool that highlights how much you are paying in portfolio fees and how you can optimize your investments.

They also recently launched an amazing Retirement Planning Calculator that pulls in your real data and produces realistic financial outcomes using Monte Carlo simulation. I’d definitely give it a try to see how you’re doing. It’s the best free financial tool on the web today.

Updated for 2016 and beyond



Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. says

    Have you ever considered moving to an area with a lower cost of living. At $3,000 per month, you could easily live in a lot of others areas around the country. I wouldn’t be satisfied with that, but to me is would be a better worse case scenario.

    • says

      I definitely have. In fact, I’ve been thinking about moving back to Honolulu since the financial crisis because there’s a paid off house there waiting to be fully occupied.

      Hawaii is my next step if I ever move away from SF. I wrote about it in, “If You Can Make It In Hawaii You Can Make It Anywhere.”

  2. Mark Ferguson says

    Great points about passive income. That is why I love rental properties and I am trying to buy as many as I can. I have 8 now and a 9th under contract. I also run a business and do my best to delegate tasks so I am not the one doing all the work. I went on vacation in November and worked maybe two hours the entire time! As a real estate agent that is unheard of. lol

    I think there are two paths to passive income. Cash flowing assets and running a business that can survive without you.

  3. says

    I love thinking about my journey towards FI and passive income! I am currently at the 25% passive income level, but it actually feels like a bit more because I definitely don’t NEED the full income I make to survive. I live on a fraction of my income, so perhaps I need even less to light out on my own.

    That said, I don’t have diversified passive income. If the stock market goes in the toilet for a year or two, I would be squeezed without my active income. I need to build other sources to help stabilize that a bit.

    I am like you though, all my passive income right now goes back into my investments.

    • says

      I hope the stock market doesn’t go in the toilet, but as we’ve seen with todays (1/24) dump of -315 in the Dow, it very well could be!

      25% is great, and also an excellent point that it feels like more b/c you don’t need 100% of your active income to live. Given you’ve been able to develop passive income, it’s likely you are saving 20%+++!

  4. says

    Passive income is tough for regular people. Right now, we’re only at about 15% passive income. Our rentals are just not pulling their weights. I guess I need to give them a few more years. Anyway, I think 40-50% passive income would be ideal as long as that is enough to pay living expense. That way, you can save all your active income.

  5. says

    I’ve never really considered the ideal split between passive & active income. I’m still in that 90% group, so my only goal is to focus on creating as much passive income as possible without having a “goal” in sight.

    My short term goals are to create enough passive income where losing my job isn’t a devastating event. But I can see myself moving the goal posts as my ratio of active/passive increases.

    • says

      Glad you mentioned the fear of losing your job. I think we’ve become kind of complacent with our job security with the huge rebound in the stock markets and economy.

      If we have prolonged weakness in both, people will start worrying about job security again. Passive income will definitely alleviate this fear, along with unemployment benefits!

  6. says

    Thanks for the breakdown of passive vs. active income levels. I’m only beginning my passive income journey so I’m aggressively trying to grow that stream – right now it is mainly made up of income stocks that are automatically reinvested, but I’m looking to move into real estate in the near future as another semi-passive income stream, as well as other possibilities. Right now I’m only at about 2.5% passive vs. active, but I look for that to grow as I become more focused.

  7. Brandon says

    Love the article. Being able to classify where your passive and active income ratio is can be a great tool for planning and decision making.

    This article got me thinking about is the relationship between income and spending, relative to these active/passive ratio categories. I almost want to see a few columns in your table for “% of income saved”.

    If I’m in the 50/50 active/passive category, my saving/spending ratio will play a big role in how I look at my need to work.

    Of course, that’s re-scoping the article a bit. The active/passive income ratio by itself is definitely a great metric to be aware of.

  8. Dan says

    Insightful that the ideal is, in fact, a split – I recently came to this realization myself. For a while I was investing primarily in income-producing assets (real estate, high yield debt, P2P loans, etc) in the interest of achieving financial independence as soon as possible. Of late, though, I’m asking myself the question, “then what?” What will I do when I get there? Certainly I’d keep working in some capacity and would continue to earn some kind of active income. This has helped me realize that “FI ASAP” is less critical than living well at the present and building a well-rounded financial picture – FI is a great byproduct of prudent saving and investing, but it’s not the end-all-be-all. This realization has led to an interesting practical result: whereas previously I was solely interested in acquiring income producing assets, now I’m more focused on growing overall net worth. I’m investing in growth equities and real estate with appreciation head room as opposed to high yield bond funds and real estate with better current yield but less long-term upside.

    I’m not sure of how to quantify the ideal ratio between the two, but your post is a considerate perspective and I suppose the ranges you identify and sentiments associated with those ranges are probably pretty accurate for most of us. Good stuff!

    • says

      “Then what?” is a huge question that we discussed about in a previous guest post. Check it out.

      I’ll tell you this… once you get to FI where all your passive income covers all your expenses comfortably, the world of possibilities opens up tremendously. I’ve got this new advisory gig now I’ll discuss in an upcoming post I’m really excited about.

      Growing net worth + having all expenses paid is a great combo goal.

  9. says

    Not to date myself too much, but I used something like this in the late 70’s! I started investing in rental properties to generate (semi passive& tax sheltered) additional income. Leverage and aggressive investing allowed me to grow it into a business. The key to rental property investing is finding larger buildings because of economy of scale. My next step was diversifying income with cash generating businesses. Now I am in a different stage of life where I want more passive income of the stock market. In retirement, I want a different mix of steady income of Social Security and a pension (COLA adjustments) which I can use for my needs and my investments for my wants.

    My theory was building assets to a point where it would yield income at some future date. I still use that same theory with my investments because now is a great time for growth and income can be reinvested for more growth.

  10. says


    Interesting concept. I don’t know if this applies to all people in a broad sense, however. Some people find purpose and passion in work, and some just do not. I fall in the latter camp.

    For example, my best friend and I talk about money and FI all the time. He’s become inspired by what I’m doing and I’m trying my best to steer him in the right direction. However, he’s made it clear that he has no interested in ever not working, but rather just wants to be flexible and secure. I, on the other hand, am completely driven by not having to “work” ever again – at least, in the traditional sense of the word. Once my dividends cover my expenses completely I’ll never have a 9-5 again. I’d love to continue writing and inspiring people, but I view blogging and typing stuff into a computer as a hobby that I make a little side money off of. And it’s good to know that I don’t have to do it. However, I never want to be in a position where I buy myself a job, and if at any time writing becomes a drag I’ll just stop.

    Best wishes!

    • says


      Not liking work and not wanting to work is great motivation to achieve FI! I got my butt kicked so hard my first two years on Wall St. that I HAD to save all I could b/c I knew I wouldn’t last.

      I think you’ll find work more fun once you don’t need the money. You’ll search for a job you’ll really enjoy.


  11. says

    I’m with RB40. 50‰ is my sweet spot.

    If you’re able to live off half your income, once you hit 50‰ passive income you know you can survive on just that and are saving all your active income.

    My passive income is still low, but I’m greatly anticipating hitting that hallway point.

  12. Anne says

    Great article ! In 2007 i was very unhappy with my job and all i wanted to do was to retire early, which prompted me to have a goal to retire in 10 years time and i think by the end of this year i would achieve my goal. But the closer to the goal i am, the more i enjoy what i do now ( maybe it is the feeling of me having a choice whether or not i work) and lately although i am very excited about reaching my goal, i often wonder whether or not i still want to retire in a few years or not. Instead, i have been thinking about keep working, not sure whether it is greed or it is the uncertainty about the future or maybe because of my extremely poor upbringing that i don’t want to stop working, also because i earn a decent wage. If i was in a low level paying job, maybe the decision to give up would be easier, i don’t know, still searching for the answer and what to do. Your article really resonates with me well. I agree we need to feel a sense of purpose. Keep up the good work Sam!

  13. Ace says

    This is much closer to the way I look at the world. I’m all about cash flows.
    If your passive income exceeds your normal expenses then you are financially independent. You can choose to work, or not. You can choose to work at something you enjoy. Etc.

    I see this as far more important than the net worth number. Net worth isn’t always a useful metric. Especially if people include so many illiquid items in that number.

    I do think that psychologically, work is good for people. Work provides a structural balance in a person’s life and the opportunity to engage outside of ones normal social environment. It also provides the challenge of learning new things.

    In my opinion, if your passive income exceeds your expenses, and you have a comfortable family life, then you are rich! Even if you live in Cleveland.

  14. says

    I’ve never thought of passive income in this way, but it makes sense. I’m still in the 90%, but I have a low stress job that pays very well. No more than 40 hours required and I work some from home. I think the magic number for me would also be the $3000/month. Not a comfortable number in the DC area, but that would give me some real options. Not sure how long that will take me from here, but I’m working on it.

  15. Josh says


    I have a few comments about this post. First, by addressing this as a percentage of total income, some assumptions are made. Using 2008 Sam as an example, you were making 3k in passive income. If you decided to become a school teacher and earned 30k a year…all of a sudden, your passive income “percentage” jumps to over 50%. Wouldn’t it be more reasonable to compare passive and active income in relation to expenses and/or budget. That way, you’d be able to determine what amount of passive income gives you what feeling (i.e. elation when %150 of expenses are covered, comfort when 50% of expenses are covered).

    Second, how are you defining passive income? With dividends, it’s pretty straight forward. However, people view rental properties in many different ways (and often get burned as a result). For instance, if you pay a $3,000 mortgage on an investment property but are collecting $4,000 in rent, is your passive income $1,000/mo. Do you factor in that $1,000 of your mortgage is going to principal…your net worth is thus increasing by $2,000/mo. Is the cost of deferred maintenance in the equation? What about recurring expenses of the property ($100/mo for the gardener, $75/mo for pest control, etc).

    • says

      Good points. I can certainly create another chart in this post or a new post comparing passive income and expenses.

      I think I didn’t because we know that if passive income covers all expenses you can do whatever you want, including working as a teacher for 50k a year in your example. The feeling of different stages is the same, and the rest is just math eg 50/50 split means passive income = to active income.

      For your property example, the passive income is net of all expenses. If not, that’s called passive revenue.

  16. says

    Sam, I’ve never really thought of my portfolio in this way. Our index fund investments have gains but I’m hesitant to think of the growth as passive income in the accumulation phase. We do rent out a room in our house though, and that might be my favorite income of all. It feels like free money. It’s only about $550 a month when we include utilities, but that little bit represents over a fourth of our monthly living expenses.

    I wonder if there might also be a correlation between the ratio of passive income to living expenses, in addition to the ratio to overall income.

    • says

      Because my assumption is that 100% active income covers at least 100% of all expenses as we live within our means, I didn’t compare passive income to expenses. But I can and will when I get the time.

  17. says

    Good synopsis. As the % passive income increases, the need to work drops and you can really choose to do whatever you want in terms of productive labor. Part time, full time, freelance, profitable hobbies, or nothing at all. I used to think I would want to get to 100% active income and quit working or earning money completely. Now that I’m at that point, it is a little hard to not think about ways to bring in a little extra income.

  18. ZZ says

    I really love reading your blog. It’s really inspirational.

    I had hoped that I had read it sooner. aka paid attention to my financials sooner.

    Hence my request: I would like to get your take and advice for those who want to achieve financial freedom but have started realizing the realities of what it takes a little late in life. What’s you take for someone seeing the light bulb in his mid-30’s, 40’s etc. What should be done when the situation is made more challenging with the responsibilities of kids etc.

    • says

      ZZ -Mid-30s, 40s is still pretty early imo as you’ve got 20-30 more years left of work if you want. Hence, there’s no time like the present and it all starts with being an aggressive saver, and figuring out the ways to mobilize your savings and make more money.

  19. nbsdmp says

    So I am with Anne who commented above. Sam you have also mentioned time and time again that the fun part is the journey towards FI…once you get there or damn close to it, your “job” becomes a little easier and more enjoyable. The little things (and people) no longer keep you from sleeping at night…you start to worry more about what truly makes you happy and focus your efforts there.

    • says

      Yes, you definitely don’t sweat the little things as much anymore. You actually start joking with your significant other about how ridiculous some office situations get and point out the “I remember when I had to kiss butt to get ahead” type of moments. It’s definitely more fun!

  20. says

    I think as soon as I’m approaching that 50-50 split I’ll start working on leaving my full time active duty job and transition to the Reserves. The Reserves offer a much easier lifestyle on the family, less frequent deployments (unless you want them), and less BS to deal with than the active duty side. I’ll still get a (reduced) paycheck and the opportunity to do what I love with a lot more flexibility. While my investments keep on producing passive income, we could live off of the active income from my day job at the Reserves. I think that could be a lot of fun. We should be there in less than 10 years.

  21. says

    @Andrew F – I am no expert, but save making sure you have your portfolio positions in the right buckets (RRSP, TSFA, Taxable) so as to minimize the taxes on dividends, income and capital gains, maybe doing some tax loss selling before the end of the year if there are any remnants of failed stock picks still in your taxable portfolio from your active stock picking days, or the extreme example of not having earned income (ie quit your job) and only having Canadian eligible dividend income so that you can take advantage of the $47K you can earn in such income (in Ontario – other provinces vary) without paying any tax (except for the $600 Ontario Health Premium) I don’t know of anything else you can do to minimize tax on your portfolio.

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