Late last year, I received a few requests to update our passive income more frequently. So here it is – a new monthly series to keep track of our passive income. Actually, this will be very helpful for me as well. Previously, I reviewed our passive income once per year and it was too much to do in one session. It will be much easier to update my spreadsheet once a month so I can stay on top of it. First, we’ll go over some background and then I’ll share the details of our February passive income.
The 2020 Passive Income Challenge
First a little background. One of our long term goals is to generate enough passive income to cover our expenses. The challenge is to do this by 2020 so Mrs. RB40 will have the option join me in early retirement. In theory, she could retire right now but she is not quite ready to pull the plug yet. She wants a little more financial security. She is also very worried about healthcare because she needs good health insurance. There is just too much uncertainty with healthcare right now. Her employer-sponsored health insurance plan is working really well for us so she wants to keep that for now.
Currently, we support ourselves by a combination of these following income streams.
- Mrs. RB40 works full-time.
- I blog part time and generate some online income.
- Passive income from the stock market, rental properties, and other investments.
This is working very well for us and we still save and invest over $50,000 per year. If Mrs. RB40 stops working now, we’d need to stop saving and start withdrawing a little money from our investments every year. In 2016, we would have needed to withdraw about $8,000 to cover our living expenses. Personally, I believe this is perfectly fine because our withdrawal rate would be much less than 1%, which is very safe over the long term. However, she just isn’t comfortable with any withdrawal, so she is determined to continue working until our FI ratio is 100%. That is – as long as she enjoys her job.
FI ratio = passive income / expense
The FI ratio is a simple way to track our progress toward total financial independence. Once we reach 100%, then it would may give Mrs. RB40 enough financial security to stop working full-time. Personally, I think 100% FI ratio is overkill, but I guess it’s better to err on the side of caution. Normally, financial independence means having about 25-30x your annual expenses which we already achieved in 2012.
In 2016, we generated about $38,000 in passive income. It was our best year so far, but that’s not quite enough to cover our expenses. We spent about $54,000 last year which makes our current FI ratio at 70%. Actually, that’s exactly where I hoped to be, so I’m satisfied with our progress. We plan to increase our FI ratio every year until it reaches 100% in 2020.
For 2017, my target FI ratio is 78%. If we can keep increasing our passive income at this pace, then we should reach 100% by the end of 2020. Let’s go over our investments one at a time and see where we stand. This year, our passive income needs to increase to $42,000. That’s a big jump, so it won’t be easy.
Here is how we’re doing so far in 2017. Our FI ratio is a bit low currently, but I think it will improve by the end of March as more dividend payout.
Dividend Income (target $11,500)
First up is our dividend growth income portfolio. Dividend income is my favorite form of passive income. You own a small part of a public company and they do most of the work for you. These days, I focus on companies that consistently grow their dividend income over the years. That way our dividend income will keep growing even if we don’t add new money. Currently, we reinvest all the income from this portfolio, but we’ll probably use it to pay our expenses once Mrs. RB40 retires full time.
As for reinvestment, I don’t DRIP in this portfolio. I just accumulate the dividend and invest in a stock whenever I see good value. Recently, I purchased Amgen, Kimberly Clark, and Consolidated Edison. The stock market is a bit high, but I’m too impatient to sit on the sidelines any longer. I’m pretty sure it will be fine in the long run (30+ years).
I’ll compare our performance to VIG, Vanguard’s Dividend Appreciation ETF.
For 2017, I expect to receive at least $11,250 from our dividend portfolio. This is assuming the dividend remain stable. I’m hopeful that we can reach $11,500 via dividend increases, reinvestment, and additional investment.
February Dividend Portfolio Update
01/01/2017 value = $329,134
02/28/2017 value = $337,230 (2.4% YTD gain)
YTD dividend income = $1,568
Our dividend portfolio is lagging the benchmark quite a bit. Some of our companies didn’t do well in Q4 last year and the market is punishing them. Target, Shell, Western Union, General Electric, and National Retail Property are all in the hole. This is the risk of buying individual stocks. A few bad stocks can drag down your whole portfolio.
VIG, our benchmark, gained 6.2% for 2017 and it is handily beating our portfolio. We are still doing pretty well, but maybe it’s time to consider going with a low cost index fund? The year is still young so we’ll see how it goes.
Rental property (target $3,000)
Currently, we have a small duplex and a 1 bedroom condo in our rental property portfolio. I’ll skip the condo because we co-own it with my brother. Besides, it breaks even so it’s not really all that interesting at this point. The duplex is more challenging because it is an older home and needs more maintenance and repairs. I just raised the rent in January, but we still won’t be making much income this year because we’ll need to paint the exterior. The appreciation has been good, though.
On a good month, we should collect about $800 in passive income. However, the exterior paint job will cost over $5,000. Hopefully, we don’t have any other major repairs in 2017.
YTD rental income = $1,949
February was a relatively good month at the duplex and we made $886. I replaced a couple of light bulbs and caulked the bathtub. It didn’t cost much so we still had a good month financially.
P2P lending (target $600)
I’m slowly pulling our investment out of Prosper.com. I’m just not a very good investor there. You’d probably have better luck if you have time to browse the loans. Our ROI is about 8% which isn’t bad. However, these unsecured loans won’t perform well when we see an economic downturn. P2P loans will be the first thing that borrowers will default on when they run into financial problems. The economy seems to be doing quite well at the moment, but I’m just getting out while we’re ahead. In February, we made $51 from Prosper.com.
YTD P2P lending income = $116
Real Estate Crowdfunding (target $500)
Here is something new – I’m going to give real estate crowdfunding a try this year. I opened an account at Realty Shares in January and invested $8,000 in a commercial property in Arizona. The ROI for this project is estimated to be 17% annually over 3 years. That’s amazing and I’m anxious to see if they can deliver. This ROI estimate is quite high.
You can sign up with Realty Shares through this link if you’re interested in real estate crowdfunding. I will write about my experience investing with Realty Shares soon. Currently, only accredited investors can invest at Realty Shares. Accredited means your net worth is at least one million dollars excluding your primary residence. I think you can still browse the investment listing even if you’re not accredited.
The investment is pending so we don’t have any income from real estate crowdfunding yet.
YTD RealtyShares income = $0
Kickfurther (target $150)
This one is more for fun. You’ve heard of Kickstarter. That’s where you try get funding to create a product if you’ve got a great idea, but what about after you’ve got a product? A company needs money to buy inventory and that’s where Kickfurther steps in.
Kickfurther is similar to P2P lending, but investors lend to small businesses instead of individual borrowers. The big difference here is the money will be used to fund inventory. The investors own the inventory and we can vote to liquidate the inventory if the business can’t sell it. (Although, if the business can’t sell their inventory, I don’t see how I can.) You can find out more through this link.
It’s interesting to see what kind of new products are coming into the market and then to pick a company to invest in. The ROI has been good for the companies that repay on time. I think I got around from 10% return in 2016. I need do our taxes and figure it out in detail. (Unfortunately, they don’t send out a 1099.) A few companies are late, but they are still actively trying to pay back. Hopefully, these late loans will be paid back soon. I only have $1,300 invested here so the income will be pretty small. You should not invest a large portion of your net worth with KickFurther. A lot of things can go wrong.
Investing in a small business is very risky and it is likely that you’ll lose some money. Only invest money that you can afford to lose. I would invest less than 0.1% of your net worth here. Truthfully, it’s a bit like gambling because you never know which business will default.
YTD KickFurther income = $54
No completed deals in February so we had $0 income last month.
This is our saving account and reward checking account. They’re boring, but everyone needs them.
YTD interest = $34
Tax advantaged accounts
Now to the tax advantaged accounts. The money in these retirement accounts isn’t readily accessible at this time, but they still count as passive income. Once we both retire full time, we’ll build a Roth IRA ladder to access these retirement accounts. All of the investments in these accounts are invested in low cost Vanguard funds. All dividend income here will be reinvested via DRIP (back into the funds).
2017 Passive Income
To wrap up, I’m optimistic that 2017 will be the best year for our passive income yet. The challenge for us is to keep our expenses relatively flat. That way, the denominator doesn’t screw up our FI ratio.
FI ratio = passive income / expense
Passive income grows slowly so we really need to control our expenses.
February Passive Income
In February, our passive income came in a bit low at about $2,000. The second month of the quarter is always a slow month for us. We’ll have a better picture after Q1 is over because most of our dividend will be paid out by then.
Our FI ratio is currently at 72%, that’s lower than I’d like. Hopefully, we’ll make it up in March and bring it up to at least 75%. Our expense was pretty good over the last two months so at least that’s going well.
If you plan to track your passive income, you should consider signing up for Personal Capital to help manage your investment accounts. They are very useful and I can get all my passive income info from one site. This is an affiliate link and we may receive a referral fee if you use this link to sign up.
Okay, that’s how we’re doing with our passive income so far in 2017. I’m looking forward to seeing how the rest of 2017 will turn out.
Do you have passive income? What’s your favorite form of passive income?