Investing your hard-earned money is an incredible opportunity. Passive income allows you to build wealth over time and ultimately gain the financial freedom to live life on your terms. However, before you get there you need to know exactly how much money you are making on your investments.
Finance Like an Adult
Simple solutions are the best option to solve complex problems. Calculating investment income sounds complicated, but the math is relatively straightforward. Simple tricks on your computer can help you know your unrealized and realized passive investment income in real time.
If you want to start with a high-level summary, please skip to the end and read the 50 Word Takeaway before continuing.
The Math Is Not That Scary
Calculating investment income is a simple calculation:
Investment Income = Fair Value minus Basis
The first component of the calculation, fair value, is what your investment is currently worth on the market. The second component, your basis is the amount invested minus the amount withdrawn.
Depending on your investing and withdrawal activity, each investment you hold will have a separate basis.
The Two Types of Investment Income
Once you know and capture the components of your investment income calculation, you need to know about the two types of investment income:
1. Unrealized Investment Income
Unrealized investment income is earned prior to you selling the underlying investment. This type of investment income is not guaranteed, the value of your investment can still change prior to you selling.
2. Realized Investment Income
Realized investment income is earned when you sell an investment. At the time of the sale, the value of the investment becomes final. Now that the fair value of your investment is confirmed, you can calculate the final amount of investment income earned on that investment.
Takeaway: In 50 Words or Less
Investment income equals the investment’s fair value minus your basis. Depending on your activity, each investment will have a separate basis. The first type of investment income is unrealized, which is generated while you hold the investment. The second is realized income, which is earned when you sell your investment.
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