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 a year and it was too much to do in one session. 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 May).
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 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 emotionally 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 as long as she can. Currently, we support ourselves by a combination of these income streams:
- RB40 works full-time.
- I blog part time and generate some online income.
- We havepassive 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 have 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 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. 80% would be plenty for her to retire. 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 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.
*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 our level, 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 = $16,410
- YTD FI ratio = 87%!
We’re doing really well so far this year. Our expense has been relatively low so that makes our FI ratio looks good. A few big expenses are coming up soon, though. We have vacations scheduled over the summer and our FI ratio will drop. 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. 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 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. Earlier this year, I purchased Amgen, Kimberly Clark, and Consolidated Edison. 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).
Last month, I moved $30,000 into our dividend account. This is actually our cash saving fund targeted for Mrs. RB40’s early retirement. It was earning 0.15% in our saving account so I thought I’d put it in our money market account which gets about 1% interest. I let it sit there for a few weeks, but I couldn’t resist investing it so I purchased VNQI, Vanguard’s international REIT ETF. Once we are closer to Mrs. RB40’s early retirement in 2020, I’ll move it to cash. VNQI’s dividend is currently 4.5% and it will give our dividend income a nice little boost.
For 2017, I expect to receive at least $11,250 from our dividend portfolio. This is assuming the dividends remain stable. I’m hopeful that we can reach $11,500 through dividend increases, reinvestment, and additional investment.
YTD Dividend Portfolio Update
- 01/01/2017 value = $329,134
- 5/31/2017 value = $375,806 (14.2% gain YTD.) This includes new investment, though.
YTD dividend income = $4,456
I’m going to stop comparing our performance to VIG, Vanguard’s dividend appreciation ETF. We added some money so that throws it out of whack. VIG gained about 9% since the beginning of 2017. That’s really good. I’m planning to move some money to VIG as we sell some individual stocks. It’s just so much easier that way.
As for dividend income, it looks like we are on pace to meet the $11,500 goal. We’re at 39% right now.
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. The duplex is more challenging because it is an older home and needs more maintenance and repairs. I raised the rent in January, but we still won’t be making much income this year because we 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 probably cost over $5,000. I need to get some quotes from painting companies. Hopefully, we won’t have any other major repairs in 2017.
YTD rental income = $4,430
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. Maybe we can put off the paint job until next year…
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 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 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 May, we made $49 from Prosper.com. We’re on track to meet our $600 goal here.
YTD P2P lending income = $352
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. We had our first pay out last month and received $71. That’s a bit lower than I expected, but that’s fine. The bigger payout will come at the end of 3 years. All in all, I like RealtyShares and I’ll invest more when we have some cash.
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. You can still browse the investment listing even if you’re not accredited.
YTD RealtyShares income = $71
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.
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 investors 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 made around 10% in 2016.
However, I found that small businesses can run into all kind of problems. Inventory went bad or the shipping container got delayed at port and missed the prime selling season. When things aren’t going perfectly, the payout is delayed or just dried out altogether. Right now, I’ve got about 10 companies that are in trouble. Most of they are still slowly paying back, but some of them might not be able to keep it up. Hopefully, these late loans will be paid back soon.
I currently have about $1,000 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 with small businesses.
Investing in a small business is very risky and there is a good chance 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 be successful.
YTD KickFurther income = $54
We had no completed deals in May so we had $0 income last month.
Here are our stats at KickStarter
- Invested in 20 deals
- Completed on time or early: 8
- Completed late: 0
- On going:4
- Late: 5
- Probably won’t get 100% back: 3
Interest (target $100)
This is our saving account and reward checking account. They’re boring, but everyone needs them.
YTD interest = $78
Tax advantaged accounts (target $26,000)
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. 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 5 months of 2017, we received $6,962 in dividend from our tax advantaged accounts. This is a little low, but it should improve by the end of the year. We are behind because some funds pay the bulk of their dividends in Q4.
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. We are doing really well this year with our expenses. It was a long winter and we didn’t spend much money at all. Summer will be a bit more expensive, though. We’ll have more childcare and vacation expenses. All in all, we’re looking good so far.
FI ratio = passive income / expense
Passive income grows slowly so we really need to control our expenses.
YTD Passive Income
The year is almost half over so here is our progress so far.
- Total Passive Income:$16,410
That’s not bad at all. The taxable accounts generated about 58% of the passive income, $9,448. The rest came from our retirement accounts, $6,962.
YTD FI ratio: 87%!
Our FI ratio was very good over the first 5 months of 2017. 87% is much better than I expected. Our expenses were low and that makes our FI ratio look good. We spent $18,758 so far this year and that’s just about $2,000 more than our passive income. Not bad at all. We’re looking really good here.
However, the FI ratio will decrease as we spend more money on a vacation, home repair, and other big bills. We had a great start in 2017 and I am optimistic that we’ll meet our goal of 78% FI ratio this year.
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? What’s your favorite form of passive income?