This is the 2016 update for our 2020 Challenge: generate enough passive income to exceed our expenses. Mrs. RB40 plans to retire in 2020 and it would be really nice if we can accomplish this goal by then. We have passive income from different sources and for this challenge we’ll count all of them. Here are the different sources of our passive income.
- Dividend Portfolio
- Real estate crowdfunding with RealtyShares
- P2P Lending
- Joe’s Retirement Accounts
- Mrs. RB40’s Retirement Accounts
Some of these are tax-advantaged accounts and we don’t plan to access them yet. The challenge is just trying to ramp up our passive income to cover our expenses. We’ll deal with how to access the fund later. Actually, my plan is to work part time so we don’t have to withdraw from our retirement accounts until we’re in our mid 50s. For this challenge, I’m only looking at the yield and ignoring the gains and losses.
This post was originally published in early 2015 and I made an estimate of our 2015 passive income. The estimate was way off due to the rental property. We had a tenant turn over and fixed a few expensive problems. We raised the rent and the rental income should be better in 2016.
Passive Income 2015
So our passive income in 2015 was much lower than expected at $28,415. The rental income was way below our estimate and it threw off my whole projection. The P2P lending income was also off, but it’s not a big deal because the amount didn’t affect the total that much. All the other income calculations were pretty close to target.
As for the rental, it didn’t generate positive cash flow, but it improved our net worth quite a bit due to property appreciation. The property market in Portland was on fire last year and real estate did much better than the stock market in that regard.
For 2016, I made a projection, but I’m not sure if we will meet it. Some stocks have reduced dividends and more might follow. The rental is also still iffy. We probably will have more expensive repairs and turn over this year. Hopefully things will be better, but we’ll just have to wait and see.
We spent $53,037 in 2015. That’s about the same as 2014 ($54,000) so at least we kept a lid on our lifestyle. If we can keep our lifestyle inflation to the minimum, I think we’ll have a chance of accomplishing our goal. It’s so easy to let your lifestyle get out of control.
Here is a simple way to track our progress toward financial independence.
FI ratio = passive income / expense
So for 2015, our FI ratio is 54%.
That’s way behind my projection which was 66%. We really need to turn the rental around this year and generate some positive cash flow. 2020 will be here before we know it and we won’t meet our goal if we keep messing around.
Here is the progress we need to make.
- 2015: 54% ($28,415/$53,037)
- 2016: 65%
- 2017: 74%
- 2018: 83%
- 2019: 92%
- 2020: 100%
Actually, if everything is on track in 2016 and we make our passive income projection, our FI ratio will increase to 70%. That will give us a big boost, but I think it will be tough for everything to pull together like that. If I can’t get good positive cash flow from the rental in a few years, I might consider just cashing out and invest in REIT instead. It will be much easier and I’m sure the cash flow will be improved. We’d miss out on the property appreciation, though. I’ll keep track of this for a few more years and see.
Another way to increase our FI ratio is to reduce our expenses. RB40Jr is going to start kindergarten in 2016 so we won’t have to pay for preschool anymore. That should help. We also plan to move into our rental home at some point. This will reduce our housing expense. I think those are the only two major expenses that we can reduce.
Anyway, it’s a great idea to keep track of the FI ratio. It will let you know how much progress you are making toward financial independence every year. It is also a good early warning system. If the FI ratio decreases, then you know you need to fix something.
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 need help keeping track of your finances, try using Personal Capital to manage your portfolio. Also check out their fantastic retirement calculator. You can read my review here – The Best Free Retirement Calculator.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe 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 every investor analyze their portfolio and plan for retirement.
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