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 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 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 following income streams.
- Mrs. 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 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 much 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.
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 this 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 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.
*2017 Target FI ratio = 78%
- YTD Passive Income = $9,943
- YTD FI ratio = 96%!
Q1 was a great quarter for us financially. We didn’t spend a lot of money and our passive income was good. 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. 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 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).
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 through dividend increases, reinvestment, and additional investment.
Q1 Dividend Portfolio Update
- 01/01/2017 value = $329,134
- 3/31/2017 value = $340,599 (3.5% YTD gain)
YTD dividend income = $2,658
VIG, our benchmark, gained 5.6% YTD. This is actually down a bit from a month ago.
Our dividend portfolio is lagging the benchmark by about 2%. 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. We are still doing okay, but maybe it’s time to consider going with a low cost index fund instead? The year is still young so we’ll see how it goes.
As for dividend income, it looks like we’re just a little behind the pace to meet the $11,250 goal. We’re at 24% right now, but I think we’ll make it up later this year. I just added $3,000 to the portfolio so that should help a lot too.
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’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 probably cost over $5,000. I need to get some quotes from more companies. Hopefully, we won’t have any other major repairs in 2017.
YTD rental income = $2,906
The duplex rental has been better than I expected this year. There were only a few minor repairs that I could do myself. We almost hit our target ($3,000/year) already so that’s awesome. Now, we just need to keep saving. Maybe I don’t need to do the exterior paint this year. I can just touch up a few spots…
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 March, we made $85 from Prosper.com. We’re on track to meet our $300 goal here.
YTD P2P lending income = $201
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 RealtyShares 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. The funding just completed in late March and I’ll report anything new next month.
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 very 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 on the loan.
YTD KickFurther income = $54
No completed deals in March so we had $0 income last month.
Interest (target $100)
This is our saving account and reward checking account. They’re boring, but everyone needs them.
YTD interest = $49
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. All 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. In Q1 2017, we received $4,067 in dividend from our tax advantaged accounts. This is a little low, but it should improve by the end of the year. A few accounts are behind because some funds pay the bulk of their dividend 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.
FI ratio = passive income / expense
Passive income grows slowly so we really need to control our expenses.
Q1 Passive Income
The year is already ¼ over so here is our progress so far.
- Total Passive Income: $9,943
That’s not bad at all. The taxable accounts generated about 60% of the passive income. The rest came from our retirement accounts.
Compare to 2016, we are looking pretty good. The YTD passive income is about 25% of last year’s. That’s actually great because many funds pay out more in Q4. All in all, I think we’re doing very well this year.
- Q1 FI ratio: 96%!
Our FI ratio is amazing in Q1. 96% is much better than I could have imagined. Our expenses were low and that makes our FI ratio look awesome. We spent $10,391 in Q1 and that’s just a few hundred dollars more than our passive income. 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 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?