Ahh… I love Independence Day! This is my favorite holiday of the year, by far. Mrs. RB40 and our son love Christmas, but 4th of July is way better. The weather is awesome and I could putter around the house all weekend. It’s the perfect holiday. I guess I just don’t have the same attachment to Christmas like most people. Christmas feels so commercialized now. It’s all about spending money and it’s bound to be cold and wet. I can’t BBQ in that kind of weather! This year, we’re not going anywhere because our house is still a mess. We moved earlier this year and we are still trying to organize everything. Anyway, we’ll enjoy Independence Day as usual. I love it.
Life is good in the summer and it’s easy to take freedom for granted sometimes. I am very grateful that we live in a country where we’re free to do almost anything we want (within reason). The US has its share of problems, but they are relatively minor compared to many places in the world. Most of us have the opportunity to build a very comfortable life here.
Unfortunately, the comfortable life is an illusion for almost all of us. Americans work more than ever before, but we are not any happier. We’re slaves to the consumerist culture. Our livelihood is dependent on the job, the boss, the fickle economy, and whichever way the wind blows. That’s not real freedom. However, there is a way out. It’s called financial independence. Once you get there, you will have way more personal freedom. So, why don’t join me and declare your Financial Independence Day?
Declare your Financial Independence Day
What does it mean to declare your Financial Independence Day? It means you’ll try to achieve financial independence.
Financial independence (FI) is a concept many aspire to, but only a few achieve. FI is difficult because it can only be achieved with deliberation and perseverance. It is a simple idea, but the execution can take years. Here are the 3 essential steps to financial independence (more in-depth article through this link).
- Track your finance – Most people have no idea what they spend their paychecks on. Money flows through their hands like water. The first step toward financial independence is to figure out how to cut back on unnecessary expenses. This can be done by tracking your spending carefully and getting rid of the expenses that don’t add happiness to your life. The goal is to spend less than you make. As long as you can achieve this consistently, your finances will keep improving.
- Save and invest as much as you can – The next step is to save and invest as much as you can. You need to take step 1 to the next level. You need to spend a lot less than you make. This will determine how fast you can reach FI. If you save 10% of your income, it will take 50 years to achieve FI, i.e., a lifetime. You can reach FI in a much more reasonable timeframe if you can save 50% of your gross income.
- Keep at it – Financial independence is a long game. You need to keep saving and investing consistently. Eventually, your passive income will exceed your expense. That’s financial independence. There are other ways to define financial independence, but this is the safest. You will never run out of money if your passive income covers your cost of living. It’s best to build in a little margin, of course. Your expenses will inevitably increase over time.
Our Financial Independence Journey
Now, I want to share where we are on our FI journey. Our main goal is to generate enough passive income to exceed our expenses by 2020. Mrs. RB40 plans to retire then and it would be ideal if our passive income can cover our expenses. Today, we support our lifestyle with the combination of Mrs. RB40’s job, passive income, and my online income. Once she retires, then her income will disappear. Also, online income is volatile. It can range from $30,000 to $80,000 per year. I can’t count on it when the next recession hits. Passive income should be more stable than my online income, but we’ll have to see how it goes.
Coincidentally, July 4th is the halfway mark of the calendar year. It’s a great time to take stock and see if we’re on track. I do this by checking our FI ratio* which I update every month in the monthly passive income report.
FI ratio = passive income / expense
Once our FI ratio consistently tops 100%, we’d be set financially for the rest of our lives. Here is how we generate our passive income. I update our passive income page every month now so check it out if you’re curious.
Passive Income Report
Our passive income did very well over the past few years.
- 2017 was the first year our passive income exceeded our spending. It was great.
- 2018 was a high expense year for us. We spent more than usual on travel and we also got a new HVAC. Fortunately, our passive income was also really good. We were really close at 99%.
- 2019 looks good so far. We moved and our housing expense decreased. That helped a lot. Our passive income decreased due to our property consolidation. However, our FI ratio should be good this year.
Let’s go through each line item in detail.
- Real Estate Crowdfunding – Our passive income is doing okay in this category. I plan to invest more in RE crowdfunding when we have excess cash. You can read more detail at my real estate crowdfunding page.
- Rentals – We’re consolidating down to just one rental unit this year. The other units are on the market. I need to go out of town more often now and I can’t be a landlord.
- Dividend Income – Our dividend income target is $12,000/year. We’re on track here.
- Interest–This is the interest from our banking accounts.
- Retirement Accounts– Our retirement accounts are all invested in low cost Vanguard index funds. We are a bit behind here because most of the dividend will be paid out in Q4.
You can sign up with PeerStreet through this link if you’re interested in real estate crowdfunding. My experience with PeerStreet has been good so far, but your mileage may vary. You can browse their projects and see if real estate crowdfunding is something you’d like to try.
What about the FI ratio? How are we doing so far?
FI ratio = passive income / expense
2019 FI ratio = $23,614 / $20,356 = 116%
Our FI ratio is surprisingly good this year. This is due to our lower than usual spending. We’re being very frugal this year because our condos are on the market. We also haven’t travel yet. Our expense will be higher in the 2nd half of 2019 due to traveling. However, I’m optimistic that our FI ratio will continue to be above 100%.
Somewhat passive income
I don’t count my online income as passive income because I work about 15-25 hours per week. Working part-time after retirement is a really good thing, though. You have something to do and bring in a little active income and a reason to get out of bed. Online income is a big part of my early retirement strategy. You don’t have to stop working completely after you retire. Ignore anyone that says you have to stop working completely to enjoy retirement. That’s ridiculous.
This year, Retire by 40 isn’t doing as well as in 2018. In the first half, our revenue was $23,218. That’s not bad, just not as good as last year. Our affiliate income decreased tremendously in 2019. One of our top affiliate went out of business and that loss was a big hit. Our other affiliates are also not converting as well as in previous years. That’s the problem with online income. It’s not stable and you never know how it’s going to be next year. We are still doing relatively well so I can’t complain. My online income is high enough to cover our expense. It’s great to have some redundancy in case there is some problem with our passive income.
Let’s take a quick look at our FI ratio over the last few years.
- 2015: 54% ($28,415/$53,037)
- 2016: 71% ($38,222/$54,000)
- 2017: 109% ($53,664/$49,131)
- 2018: 99% ($56,918/$56,638)
- YTD 2019: 116% ($20,356/$23,614)
Here are our targets for future years.
- 2019: target 100%
- 2020: target 105%
- 2021+: target 110%
The FI ratio looks good for the coming years. Our expense dropped significantly from moving to our duplex. The passive income will be lower too, but I think the numbers will work out favorably. Next year will be a pivotal year for us. Mrs. RB40 plans to retire in 2020. Our passive income + my online income should give us a comfortable margin. I’m sure we’ll make it work somehow.
Okay, what are you waiting for? Declare your Financial Independence day and GO FOR IT! Financial independence will take a long time so the earlier you start the earlier you’ll get there. Don’t wait too long!
Do you keep track of your passive income vs expense? The ratio should improve every year if you hope to reach Financial Independence.
If you plan to track your passive income, 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. That’s much easier than logging into every brokerage, banks, and retirement account separately. It’s a great site for DIY investors.
Enjoy the long weekend!
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.