I was on the wrong track. Work was consuming all of my waking hours, and my house was a time and money sink hole. I was angry and frustrated. I wanted out
I looked at my most recent bank statement. Last month I had earned $0.06 in interest. 6 cents?! I was doomed!
I had a mortgage and a student loan. Most of my savings was locked up in my 401k or home equity, and the value of the latter was highly questionable
I needed some passive income. Who wants to continue trading hours for dollars, when money can magically appear in your bank account while you sleep? The late night infomercials promised over night success
Of course like most good magicians, behind the illusion is years of hard work, dedication, and practice. It is one thing to understand how to earn income while you lounge on the beach, and another to make it happen
But if you are diligent and overcome the challenges, one can go from being burdened by debt to having assets that earn more than your cost of living in a relatively short period of time.
There are many different ways to generate passive income. We can learn a lot from people that are already successful.
- Jason Fieber of Dividend Mantra is building a nest egg of dividend growth stocks
- Paula Pant of Afford Anything is building a real estate empire, one house at a time.
- Jacob Lund Fisker created a stock portfolio, built a successful website to help others retire early, and wrote a book
.
.- J. Money has a successful website helping others increase income through side hustles
- A good friend of ours earns $1,000’s a year from his photo portfolio
While each of these examples can be a great boost, at the same time, standing at the bottom of the mountain it can look impossible to reach the summit.
This is where it helps to have passive income milestones
First, I had to pay off my student loan. $0.06 in the bank account wasn’t even a start if I was paying $100’s in interest each month.
Little by little the savings grew
I paid off the student loan. I sold the house and moved into a small apartment. I started riding my bike more
I was earning $1 a month in my savings account
Dividends now paid for the monthly cost of Internet Service, and then all of my utilities
Interest and dividends now covered the cost of rent. I would never be homeless
Investment income was now earning the equivalent of minimum wage, then $5.15/hour. Never would I have to work at Wal-mart
And then it happened. About 7 years after setting the goal, our assets were enough to support our cost of living. 3 years later, I quit my job
It wasn’t all easy, there were mistakes and losses along the way, but being able to look at the milestones kept us motivated and kept things in perspective
What is your next Passive Income Milestone?
Which passive income method did you guys go with? I’ve been reading through your blog a little bit but didn’t see how you guys did it yet. My wife and I have been pretty frugal and saving, but living in a high cost of living area (NYC) makes it tough. I’ve mostly invested in index funds (in 401k and Roth IRA) and generally focused on growth vs dividends. Recently I’ve been looking into rental properties though it would have to be out-of-state since once again…NYC is too expensive. P.S. Congrats on the baby…we have an 18 month old…and I remember the newborn months like they were yesterday.
Hi Andrew.
Thank you, we are excited for GCCjr to join us in April. I’m sure countless sleepless nights will be etched into our memories as well
There are probably 10 blog posts I can write about what we tried investment wise. I lent money to real estate investors… I provided loans to used car buyers… I sold my own car on a note… I traded options… We almost bought a whole apartment building…
Today, aside from one last seller backed mortgage, 90% of our money is in the most passive of passive income sources: index funds
I met a much older guy once, can’t remember when or where, but he claimed he was just handed the keys to a NYC apartment in the 70’s. “Worst thing that ever happened to him.” The building was falling apart, most of the renters were drug addicts or prostitutes, and none of them paid their rent because they hated the original owner. Through a lot of hard work he turned it around though, and it helped him retire albeit late in life. Hard to imagine something like that happening today. I need to remember where I heard that story
Cheers
Jeremy
HI, just wondering what your thoughts are on the vanguard funds in a down market, do they pay sufficient dividends? Someone buying now at record high levels couldn’t expect the same returns vanguard funds have been getting in recent years?
I suppose it depends on how much cash flow you need?
Current prices are nowhere near record high levels, and seem reasonably priced
http://www.multpl.com/
Jeremy,
Great stuff. I definitely agree!
I track my dividend income on a monthly and annual basis exactly because of this. I can line up the dividend income against expenses in a % format, much like the YMOYL wall chart. Slowly but surely, you see the gap closing. It’s a wonderful thing, :)
Thanks for the mention. I definitely don’t think you’ll ever have to worry about working at Walmart. Keep on living the good life!
Best regards.
No Wal-mart, a small apartment with rent paid, and a lifetime supply of internet. What more does one need? :)
I think your story is a great example, Jason. In 2010, you earned $269 in dividends. In 2014, you made that every month, and then some! Impressive and inspiring!
It’s amazing what you can do if you continue putting money away right?
When it comes to index funds for passive income… are you selling the funds on a monthly basis or you’re living off the fund’s distribution?
Compound interest is a wonderful thing
I’ll write a blog post on this, because it is hard to answer in a short comment. If you look at our 2013 expenses and taxes, most of it was covered by dividend and interest income. In 2014, it was the same except for IVF related expenses. I try to do stock transactions at most once / year
Agreed – I’d love to get more details of how you guys are rocking your passive income. Cheers to your smart decisions :)
Thanks much Emma! More details coming
I agree with Andrew. Can you elaborate on your strategy? I’m saving over 20% of my salary with just 401K, Roth and cash. I’m also paying down my mortgage aggressively. To me, it doesn’t make sense to start investing in taxable accounts to reap dividend payments until I’ve maxed my 401K and Roth.
When you discuss your passive income, are you referring to your retirement accounts or taxable investment accounts?
Thanks!
Hi Ryan,
Taking advantage of tax-deferred accounts, especially if your marginal tax rate is 25% or higher and if you are much younger than 59.5. I’m on the same page as you with maxing the 401k.
The ROTH, maybe not as much agreement, but since I don’t know your full situation I can’t say for sure. It depends on taxes. I can also argue against paying off the mortgage quickly vs investing excess funds elsewhere. Pros and cons to each
In our case, we were saving 70%+ for several years and even maybe 100% in the final 3 years. When saving that much, it is inevitable that you end up with funds in a taxable account. https://gocurrycracker.com/10-years-and-a-day/
I’ll explain more in a targeted post
Cheers
Jeremy
Hello. could you direct me to the post where you explain more? my confusion is. You max out in retirement accounts as well as taxable brokerage accounts but since you are not 59.5 yet your main source of passive income is through your taxable accounts? I am a little confused.
Hi Juan, see my response to your other comment on this post
It is possible to access your IRA/401k funds before Age 59.5 without penalty. Which method is best depends on age and relative size of IRA to brokerage account, amongst other factors
I second Ryan’s question. We have also been focusing on maxing out tax-advantaged retirement accounts and paying down the mortgage.
Tax advantages accounts are the way to go. There is no sense in paying 25% – 39.6% in taxes now when you can pay 0% now and later
I can also see the appeal of paying down the mortgage, but in many cases would argue against it. It depends on many factors, including personal temperament though so there is no 1 Right Answer
I’m so very glad to see this post, and hear that more are on the way, regarding this particular area. I’m contributing to both a Roth IRA and a 401K, but maybe only about 15% total of my income, and have started to put money into a taxable account. I figure if I want to retire in, let’s say 10 years, I want to have access to that money and I don’t see how maxing out my 401K will support me in that way. I might be missing something? I’m sure you’ll go over it; I sincerely look forward to your future posts that go more in depth. I’m also happy to hear everything on the baby front is going well – wow, 3 more months! I remember the day you shared the news, it seems like only last month.. :O Time flies!
Time does fly! It’s going by so fast. Every morning it seems like Winnie’s belly is a little bigger, and we can almost set a clock by the start time of GCCjr’s daily kung-fu practice
Generally speaking, if you are in the 25% tax bracket or above and much younger than 59.5, it would be hard to argue against taking the tax deductions now. There are numerous ways to access the funds before age 59.5 (http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Tax-on-Early-Distributions)
More in an upcoming post
Thanks Jamie!
We reached a goal just this month. With our latest investment, our dividend and interest income now exceeds my husband’s pension income. The pension is used to support all of our regular expenses. The investment income is used for travel and reinvested to make even more money.
This is awesome! You created your own second pension. Congrats!
Would you mind sharing what you have invested in?
Ah milestones, a great motivator for so many of us! I know for me, besides keeping monthly and annual totals, I boil it down to an hourly rate as well. This year, I’m aiming for $2.60 an hour. Each year that number will grow and alleviate the need for the day job.
I love thinking of it in terms of hourly rate. It is like suddenly I was getting paid to buy groceries, read books, and play guitar
And when done with tax efficiency (no FICA or Income taxes) the effective rates is even higher
Good luck with getting a good raise this year!
It’s funny, but I don’t even know what the next milestone will be. You’ve given me something to think about, since nothing motivates quite like a big goal.
One idea for the ultimate milestone: Enough
It isn’t so much a dollar amount, a net worth, or an hourly rate, but a state of mind
(My inner new age hippie revealed)
Your living my dream! I’m going through the process of building an asset base to help grow a passive income stream. I’m concentrating on property and dividends.
The plan is to build $10m in assets to create $500k in passive income (over 20 years).
$500k/year could provide for some fine livin. Especially with multi-family properties, $10 million is definitely possible over 20 years. Good luck!
Very aggressive goals, but you have to aim high in this life!!
I still remember that first big fat dividend payment on my first mutual fund in my brokerage account. Something like $100. Amazing that I could take a few thousand dollars, push a few buttons at Vanguard’s web site and turn it into something that pays me $100 every December. Like I was an alchemist. Or Midas. It’s still mind blowing even though the hundreds changed to thousands and it’s continued for a decade.
I love dividend season. It’s like Santa Claus brings us big buckets of cash every year, even if we’ve been bad. Which is often the case
I like the idea of making it hourly. I’ve never thought of it that way.
your post was a good way of putting the journey into segments that show you can see the progress and early retirement does not just happen overnight.
My next milestone is $10k in dividends, even though most of my investments are in tax advantaged accounts.
$10k/year is almost $5/hour, not a bad income for sitting on your duff at home
As I figure it, income in an IRA/401k is still income. Congrats!
but can you use dividends from IRA/401K before 59.5?
I will have to write a post on this. You can access IRA/401k funds before 59.5 through 72t withdrawals, the most common of which are SEPPs and Roth IRA Conversion pipeline.
This post explains:
http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
My comment above that “income in an IRA is still income” is based on the idea that money is fungible. If you receive $100 in income in your IRA, you can spend $100 from your brokerage account and have the same impact to net worth
Thanks for your response. So when you were saving you were maxing out your retirement accounts and the remainder would go onto your brokerage accounts. So right now you mainly are living off of your brokerage dividends and cap gains? In order to retire early you had to save up almost 1 million in brokerage accounts? So your net worth was probably more since you are also saving in retirement accounts right?
For spending $40k/year, $1 million across all accounts is sufficient. It doesn’t need to be all in the brokerage account
From the 40k/year some of it comes from your retiremet accounts? This goes back to my original question about being able to take out money before the required age on your retirement accounts. Thank you so much for answering my questions.