Late last year, I received a few requests to update our passive income more frequently. So here it is – a 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 a year and it was too much information in one sitting. It is 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 see our YTD passive income (up to the end of November).
The 2020 Passive Income Challenge
One of our long term goals is to generate enough passive income to cover our expenses. The challenge is to reach 100% FI ratio 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 worried about healthcare because she has some pre-existing conditions. 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 it for now. Currently, we support our moderate lifestyle by a combination of these income streams:
- RB40 works full-time.
- I blog part time and generate some online income.
- We have passive income from the stock market, rental properties, and other investments.
This is working very well for us and we continue to save and invest over $50,000 per year. If Mrs. RB40 stops working now, we’d probably stop saving and may need to withdraw a little money from our nest egg 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 less than 1%, which is very safe over the long term. Actually, we don’t need 100% FI ratio because we still have my online income. 70% would give plenty of margin for her to retire. We could cover the rest with my online income. 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.
2017 has been great so far and you can see our latest monthly cash flow reports here.
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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 suppose 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.
*Caveat – I’m not going to worry too much about tax at this time. We’ll deal with it when we hit 100% FI ratio. At this level of income, tax should be minimal.
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 means our 2016 FI ratio was 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 $4,000 increase, so it won’t be easy.
*2017 Target FI ratio = 78%
- YTD Passive Income = $42,945
- YTD Expense = $45,460
- YTD FI ratio = 94%!
We’re doing extremely well so far this year. Our expense has been relatively low so that makes our FI ratio looks awesome. Even with 2 vacations, we are on pace to spend about 10% less than 2016. Travel hacking really helped out this year. Here are the details.
Dividend Income (target $11,500)
First up is our dividend growth income portfolio. Dividend income is my favorite form of passive income. Investors own a small part of these public companies and they work for you. These days, I focus on companies that consistently grow their dividend income over the years. This strategy will ensure that our dividend income keeps growing even if we don’t add new money. Currently, we reinvest all the income from this portfolio, but we’ll 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 or real estate crowdfunding whenever I see good value. Earlier this year, I purchased Amgen, Kimberly Clark, Consolidated Edison, and Helmerich & Payne. The stock market is expensive right now, but I’m too impatient to sit on the sidelines. I’m pretty sure it will be fine in the long run (30+ years).
For 2017, I expect to receive at least $11,500 from our dividend portfolio. This is assuming the dividends remain stable. I’m hopeful that we can reach our dividend income goal through dividend increases, reinvestment, and additional investment.
YTD Dividend Portfolio Update
- 01/01/2017 value = $329,134
- 12/01/2017 value = $372,857 (13% gain YTD.)
YTD dividend income = $10,280
It looks like we are on pace to meet the $11,500 goal.
Here is a chart of our dividend income since 2012.
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. (We put the condo on the market because our tenant moved out.) The duplex is more challenging because it is an older home and needs more repair and maintenance. I’m raising the rent a little in January and that will increase our rental income next year. When the duplex tenants move out, we’ll most likely move in to the house.
YTD rental income = $10,094
The duplex rental has been better than I expected this year. There were only a few minor repairs that I could DIY. We hit our target ($3,000/year) already so that’s awesome. Now, we just need to keep saving and prepare for expensive maintenance jobs. We’ll need to paint the exterior soon and that will have a big impact on the rental income next year.
I met a neighbor who has a similar rental in the same area and he told me he pulled in $50,000+ from renting the basement unit last year. That’s pretty crazy. I’ll have to seriously consider a basement remodeling and putting it on Airbnb. $50,000 is almost enough to pay for our annual expense.
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 screen the loans. Our ROI is about 7% 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 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. We made $531 from Prosper.com so far in 2017. That’s not too bad. Currently, we have $4,420 left at Prosper.
YTD P2P lending income = $531
Real Estate Crowdfunding (target $500)
Here is something new – I’m giving real estate crowdfunding a try this year. I opened an account at RealtyShares in January and invested $8,000 in a commercial property in Arizona. The ROI for this project is estimated to be in the high teen after 3 years. That’s amazing and I’m anxious to see if they can deliver.
Since my first investment, I’ve invested $5,000 in an apartment in Texas, $5,000 in a new Church Chicken in Florida, and $10,000 in an apartment in Arizon. Read more about my experience investing with RealtyShares here. All in all, I like RealtyShares and I plan to increase my investment with them next year.
You can sign up with Realty Shares through this link if you’re interested in real estate crowdfunding. You can browse the investment listing and see if any project is interesting.
YTD RealtyShares income = $398
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 when 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.
I tried investing at Kickfurther, but I don’t think it is a good way to invest. Small businesses have way too many problems. Inventory went bad, the shipping container got delayed at port and missed the prime selling season, or the mall closed. When things aren’t going perfectly, the payout is delayed or just dried up altogether. Truthfully, it’s a bit like gambling because you never know which business will be successful.
YTD KickFurther income = $59
Interest (target $100)
This is our saving account and reward checking account. They’re boring, but retirees need a hefty cash cushion.
YTD interest = $189
Tax advantaged accounts (target $26,000)
Now to the tax advantaged accounts. The money in these retirement accounts isn’t easily 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 our traditional IRAs so we don’t have to pay the 10% early withdrawal penalty. All of the investments in these accounts are invested in low cost Vanguard funds. The dividend income here will be reinvested via DRIP (back into the funds).
You can take a look at the dividend in the spread sheet below. Over the first 11 months of 2017, we received $21,393 in dividend from our tax advantaged accounts. This is a little low, but it should improve by the end of the year. We are a bit behind because some funds pay the bulk of their dividends in Q4.
2017 Passive Income
To wrap up, 2017 is turning out to 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. We are doing really well this year with our expenses.
- YTD Passive Income = $42,945
- YTD expense = $45,460
- YTD FI ratio: 94%
Our FI ratio is fantastic this year. The biggest change from 2016 is the income from our rental property. We haven’t had a big maintenance bill so the rental income is much better than last year. Our expense has been great too. We are spending less this year because our kid is going to public school now and we don’t have to pay for daycare. Our vacations are cheaper this year as well due to successful travel hacking. Higher income plus lower expense equal a great FI ratio.
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 data from one site.
Do you have passive income? Is your passive income enough to pay your cost of living?