How I Got to Averaging $1,000 a Month in Passive Income

Since I began posting my monthly passive income & portfolio updates a few months ago, I received a message congratulating us on reaching the mark of “receiving $1,000 a month in passive income.”

Huh? This seemed odd to me.

I certainly don’t see a check or a deposit for $1,000 a month in passive income hitting our bank and investment accounts.

I replied back to the message and, via some additional discourse, realized it was our monthly average for the prior 13 month year-over-year (YoY) period. Damn.

Why didn’t I do my own analysis to realize this yet? The rest of the conversation briefly asked how I got there and for some of the details on the steps I implemented.

The answer is really just what you can find in any number of available personal finance books and resources:

spend less than you make, save/invest the difference, and repeat.

Want to accelerate the process?

Increase your income and decrease your spending even further, save/invest the difference, and repeat.

But then I gave it some more thought. While I did follow “the basics” and leverage time, I also learned – from successes and failures – what worked for me.

And I’m still doing this – it’s ongoing and unique to each respective individual’s circumstances.

But the experience of getting to this point evolved around (1) dynamic lifestyle approaches and (2) variables that can influence one’s unique progress.

Defining and Considering A Dynamic Lifestyle Approach

Depending on your personal goals and objectives, you might decide to sacrifice more today to fulfill your accomplishments sooner.

Alternatively, you might decide that you’re in no rush to meet your goals (assuming you have any).

The following are 3 primary dynamic lifestyles that I’ve considered and/or partially lived in the past:

• (1) The Balanced Dividends All-In Approach
• (2) The Balanced Dividends Moderate Approach
• (3) The Balanced Dividends Screw The World Approach

I sometimes fluctuate between the 3 but tend to hover above the Moderate Approach leaning slightly toward the All-In Approach.

Please note that the two extremes of the approaches (All-In and Screw the World) are intended to be just that – extremes.

There will obviously be variance within the spectrum of lifestyle approaches.

1) The Balanced Dividends All-In Approach

To the max, this would entail saving and investing as much as possible toward early retirement and/or financial independence.

You want Kraft Mac & Cheese for dinner? Too bad, you’re getting the generic local grocery store brand instead because it cost 18 cents less.

That night out with friends? Unless they’re coming over to your parents’ house for the bagel bites that your parents bought, it’s not happening.

Some other behaviors or conditions across primary budget categories:

2) The Balanced Dividends Moderate Approach

The moderate approach is the middle ground between the All-In and the Screw the World Approaches. Investing and saving for tomorrow is important, but so is investing and living for today.

Striking a balance that works for you is key.

Related: FTW! Is it Possible to Invest for Today AND Tomorrow?

Some other behaviors or conditions across primary budget categories:

3) The Balanced Dividends Screw The World Approach

This is the I-live-every-day-as-if it-were-my-last day approach. Tomorrow might not come, so why should I give a damn about saving or investing for the future?

Let’s max out those credit cards and screw even covering the minimum payment amount each month!

Some other behaviors or conditions across primary budget categories:

Evaluating the Three Lifestyle Approaches

Overall, this ultimately comes down to the respective individual. If you’re happy living an extremely frugal lifestyle, go for it.

Don’t give a damn about tomorrow? Have fun, but be mindful of tomorrow’s needs. Just be aware of the potential implications of any particular decisions.

Personal Lesson Learned: From a long-term perspective, we found that a moderate or balanced approach makes us the happiest. Yes, of course, I’d like to receive $25,000 or more a month in passive income by doing absolutely nothing and without any hard work. Sign me up!

On the flip side, I didn’t want to be living in my parents’ basement (and I know they appreciate that as well). But there is nothing wrong with living with family. I stayed with family when initially looking for a place to live in New York.

For me, I want to achieve financial independence, but I also want to enjoy the ride along the way. This also made me reconsider how I spend my spare time.

Related: Why I Spend $2,148 A Year On Orange(s)

Considering 5 Variables That Can Influence One’s Unique Progress

Aside from which lifestyle approach to consider pursuing, I also evaluated things that can also have a direct impact on other actions or behaviors that have contributed to my current ability to get to $1,000 in passive income a month.

1) Utilize Dollar Cost Averaging (DCA) AND Lump Sum Investing

Dollar-Cost Averaging or “DCA” involves investing a fixed amount at a fixed interval. If you regularly contribute to your employer-sponsored 401(k) or 403(b) every paycheck, you’re dollar-cost averaging.

Do you invest $20 or $200 in your Roth IRA or your kid’s 529 account on the first day of each month? Dollar-Cost Averaging.

Lump-Sum Investing is what it sounds like – investing a lump sum of money at once. I won’t go into the pros and cons, but both have advantages and disadvantages to be considered (checkout Vanguard’s overview, one of among countless sites you can find information on to do your own research before deciding to take any action).

Personal Lesson Learned: I did both – especially in 2008-2012 when the market was down. If Ineeded additional cash or anticipated a larger purchase in a shorter period of time, I dialed back retirement contributions for a paycheck or two while maintaining the minimum required to get the full employer match.

Bonus time? I raised my retirement contributions to reduce the bite of a much higher tax rate.

Remember to consider both your current and future needs.

2) Practice Patience – Slow and Steady, Getting Dividend Heavy

Without a sudden and/or short-term infusion of capital (an inheritance, bonus, buyout from a business, etc.), it takes time to build a passive income stream via portfolio (stock, bond, real estate, etc.) income.

Assuming you had $1 million invested returning an annual average of 4%, you’d receive $40,000 in passive income (ignoring taxes), or ~$3,330 a month.

In other words, it takes time to build up momentum and progress. Higher earners also tend to save a higher percentage of their incomes.

Personal Lesson Learned: Don’t have $1 million lying around to invest? Yeah, me neither.

Start saving and working to increase your income so you can save/invest more. Each dividend distribution though is like a hit of a little bit of motivation.

Eventually, you’ll see and begin feeling progress. Don’t get distressed or falter because you feel you’re not making massive gains overnight.

Related to lifestyle approach, you’ll likely (or hopefully) encounter wage or income increases during your career. Each time you get a raise, you have an opportunity to decide how to allocate that additional income. M

ore spending might not always mean more happiness.

On the other hand, living in a really, really small apartment on top of each other also didn’t make me happy.

Be mindful to balance income growth vs. lifestyle inflation.

3) Leverage Different Account Types

Generally, the more you make, the more you’re taxed. If available to you, consider utilizing tax-advantaged accounts (401(k), IRA, etc.).

Again, this is nothing new or ground-breaking. But take advantage of the tools that are available to you. Many colleagues, friends, and family members do not utilize these available tools or resources.

Related: 5 Ways to Balance Account Types To Balance Life’s (Un)known Milestones

Personal Lesson Learned: In 2010, I got married. To congratulate us on our vows, the government smacked us with a higher tax bracket. Congratulations! You now get to pay more because you’re married instead of single.

Fortunately, I got married toward the middle of the year and had some time to assess what our combined tax impact would be at the end of the year. I ended up ramping up pre-tax 401(k) contributions the last 2 months of the year to lower our taxable income.

I had been focusing on Roth 401(k) and Roth IRA contributions, but I wasn’t lowering our taxable income. Without going into the pros and cons of a traditional vs. Roth 401(k) or IRA (more on that later), I found it helpful to utilize both account types. And this doesn’t include what type of assets I considered holding in each account type.

Overall, your respective individual circumstances will always be unique to you. But you’ll likely find that they can change and most likely won’t remain the same for your entire life. H

aving savings in both retirement and non-retirement accounts might be useful.

4) Consider Geographical Arbitrage

This typically means living in one country and earning income in another country’s currency. For example, you might be paid in US Dollars and live in a country where the US Dollar has more purchasing power.

Moving to a country or region with a lower (or higher) cost of living can potentially have a significant impact on your finances.
 
Personal Lesson Learned: For me, while I still stayed in the same country (US) and still earn in the same currency (USD), I moved from New York City to Chicago.

Depending on the sites you leverage, you’ll find housing costs 50-60% lower in Chicago than in New York. I effectively doubled our square footage in Chicago for less than what I paid to live in what felt like a box in New York City.

Chicago is still not cheap, but the move enabled us to increase our quality of life (from a housing perspective) without impacting our investments.

Not willing to or can’t move countries, states/provinces, or cities? Consider moving to a different part of town and you might be able to utilize some of the effects of geographical arbitrage in a local manner.

Related: 10 Years Lost? Our Renting Remorse(lessness)

5) Don’t Try to Control What You Can’t Control

No one knows for certain when the markets will go up or down, or how far and for how long. If you hear otherwise, be wary. No one can control or predict these aspects of the market.

However, you can generally have some influence on the following (among others):

• Asset Allocation – depending on your savings or investment objectives, different types of asset classes might be more pertinent to your unique circumstances.
• Expenses – you can’t decide or set the expense ratio of a mutual fund. But you can decide which ones to invest in.
• How Much You Save – admittedly, there are variables that can arguably determine how much you can or can’t save, but you ultimately have the ability to save less or more of your income.
• Your expectations – what you feel and think is influenced every day by countless factors; however, you ultimately decide how you are impacted.

Personal Lesson Learned: Looking back, I spent so much time focused on finding the “perfect” asset allocation that I almost delayed starting to invest.

I also made stupid emotional decisions (including plowing $100,000 into a utilities stock index fund for a year chasing dividend income). I kept chasing and almost obsessing about things I couldn’t control. This doesn’t help to get to $1,000 a month in passive income.

Redirect that energy and focus elsewhere.

Related:

Self-Motivation & Reflection

A 10 Year Reflection: To Gym or Not to Gym?

Wrapping It Up

I got to $1,000 a month in passive income over +10 years and by applying behaviors that enabled us to carry positive momentum forward:

• Defining what success means for you; personal finance is personal.
• Realizing there is no single or “best” strategy; you’ll need to potentially adjust as you go along.
• Focusing on what you can control – not on what you can’t control.
• Not chasing yield just for the sake of increasing passive income.
• Understanding progress feels good but it can also feel overwhelming if expectations are not managed properly.

Overall, one’s respective outlook depends on so many unique variables for each respective person; consider trying to find a lifestyle approach that will ultimately make you happy.

Then evaluate what tools, behaviors, and decisions may have an impact on your goals.

Looking Back and – More Importantly – Ahead

It feels good to look back at the progress I’ve made. As I’ve experimented with different lifestyle approaches, I’m able to better understand what works for us. I’m still experimenting with this constantly.

My primary passive income building efforts first focused on retirement accounts. I’m now looking to expand passive income in our non-retirement accounts.

Getting to $1,000 a month in passive income is possible. You just need to make it a priority. Our focus or priorities will likely change again. It’s always ongoing as I continue to find our balance.

Readers, what lifestyle approaches have you tried or what are you trying currently? Do you have any behaviors or actions that you’ve found helpful? Anything that you’d suggest to potentially consider doing?

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Related:

Balanced Dividends Passive Income Analysis: 2016 vs. 2017

3 Lessons Why “Assumption Is The Mother of All F*ck Ups”

5 Ways to Balance Account Types To Balance Life’s (Un)known Milestones

FTW! Is it Possible to Invest For Today AND Tomorrow?

10 Years Lost? Our Renting Remorse(lessness)

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