Some define passive income and portfolio income differently. For simplicity, I’m considering them one and the same – income NOT “earned” via a paycheck from my employer. Here is our passive income breakdown as of month-end. We use Personal Capital to track our net worth, assets vs. liabilities, and cash flow.

December 2017 Update

Following great feedback from last month’s update, I attempted to give a “face lift” to the primary month-over-month summary table. Additionally, I’ve added an account type perspective to highlight taxable vs. non-taxable accounts on a quarterly basis. I’m still playing with additional charts or graphs, but I prefer tables for the time being because I like to see actual numbers. More to come soon though.

I also attempted to reorganize some of the content. Overall, I greatly appreciate your comments and feedback.

Don’t also forget to checkout the revised 2016 passive income summary! I’ll be posting a 2016 vs. 2017 year-over-year (YoY) comparison in the near future as well.

Let’s now dive further into December’s results.

Background

I had a change of heart toward retirement in October. Nothing changed significantly in November, but we made some decisions in December that will impact our outlook in 2018. Our continued motivation comes from reaching an average of $1,000 a month in passive income. Additionally, we took a further look at how we’re leveraging different account types. This is near the forefront of our investment decisions.

We are taking active measures to increase our earnings or income to invest additional capital. But tax considerations and account allocation can have a significant impact on one’s returns. Again, we consider this an important factor, but not the primary driver of what type of assets we consider.

Related: Tax Reform & Your PFUI: Applying the 10 Heuristics

Key Monthly Highlights

After a slow month in November with only interest in one of our taxable accounts, December brought about both surprises and a little disappointment:

1) New Investment Opportunities – Our initial contributions into Fundrise weren’t made based on which month potential distributions are paid out, but it is nice to see some passive income occur in a different month each quarter. While December did NOT contain any distributions from Fundrise, we brought our total investment to $3,500 as we looked to diversify our existing REIT holdings in my Roth IRA.

We might explore other individual holdings or opportunities that pay on a different frequency, but I don’t think we’d solely consider a particular investment just because of its payout frequency. Fundrise currently pays our distributions out in the first month of each quarter (January, April, July, and October). We reinvest all proceeds.

2) Steady Stalwart Stalling? – Related to real estate exposure, my Roth IRA’s REIT Index holding paid out an impressive $1,233 in tax-free income in December. This totals $3,389 for 2017. While I’m very happy with this figure (especially considering it’s tax-free via the Roth account), December’s payout was down a few hundred dollars vs. December 2016’s figure. I’ll cover this more in the YoY comparison.

3) Dividend Growth Domination – My traditional, pre-tax rollover IRA – which composes the bulk of our net worth – had a great month. We received just over $3,900 in December alone – and over $7600 for the year. As mentioned previously, we’re not actively contributing to our IRAs. So this tree is growing up strong on its own!

4) Year-End Boosts – Our taxable accounts paid out a combined $247 in December bringing our total to $670 in 2017.  Comparatively, our non-taxable accounts paid out a combined $5,484 in December, for a total of $11,593 in 2017. Clearly, December is by far the largest contributing month.

Overall, 94% of our passive income is now coming from retirement accounts. Growing taxable account passive income will continue to be a priority in 2018. Diversification is key.

Related:

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

BD’s (Semi-) Automatic Ecosystem

BD’s Apps & Tools

Passive Income & Portfolio Updates

Summary of Results

As we didn’t launch Balanced Dividends until mid-2017, here is a retroactive review of 2016’s Passive Income. We use Personal Capital to track our net worth, assets vs. liabilities, and cash flow.

Reminder – Emergency Savings vs. Retirement Investing

In mid-2014, I switched employers after being with my first company out of school for nearly 7 years. My wife and I had very little cushion between each pay check. Not because of excessive spending, but rather from saving anywhere from 15-25% of my take-home pay in retirement accounts for several years. This included a mix of (1) pre-tax or traditional 401(k) contributions and (2) ROTH contributions – both 401(k) and IRA.

There are a number of articles and opinions on the benefits of contributing to a traditional IRA or 401(k) vs. a ROTH IRA or 401(k), but I’ll perhaps explore that another day. In general though, we found it more difficult to contribute to a ROTH IRA or 401(k) as we’re putting away money that has already been taxed (vs. a traditional IRA or 401(k) where money has NOT yet been taxed). We ultimately went for a balanced approach.

A few months after starting my new job, a former colleague experienced an abrupt, unforeseen medical issue. Fortunately, he had insurance to cover the costs of a necessary procedure, but he also had to pay a few thousand dollars out-of-pocket. Reflecting at what had happened, I realized that we would have been unable to cover the sudden out-of-pocket costs.

So for about 18 months, we reduced our retirement contributions to the minimum in order to build up our taxable account investments and savings. We now have roughly 4 months of expenses covered, which is spread out between a few different taxable accounts.

Staying the Course – Still Planting Seeds and Growing Trees

All of the passive income in all of our accounts – both retirement and non-retirement – currently gets reinvested. As retirement dividends currently account for nearly 94% of our passive income, we’re just beginning to increase the number of sources of passive income in taxable accounts and from other sources.

Our traditional bank checking and savings account are considered “high-yield”, and we love Ally Bank which has competitive rates and great service. We’re not holding a large amount of assets in checking and savings accounts at the moment though due to the still relatively low-interest rate environment. We began funding an Acorns investment account and Robinhood investment account within the last year to begin increasing our taxable investments.

We’ve also looked at peer-to-peer lending and other crowd-sourcing investment platforms, but haven’t decided to invest (yet). We might also start a CD ladder if interest rates increase again.

Related: BD’s Apps & Tools

Investment Portfolio Allocation

This includes our retirement and non-retirement investment accounts. Here is our high-level portfolio allocation as of September 2017 month-end (we’ll look to continue to provide quarterly updates on actual allocations). Due to timing, we anticipate this content to change after the FIRST month of each quarter in 2018.

We use Personal Capital to track our net worth, assets vs. liabilities, and cash flow. It’s free and a great tool. The above shows our allocation from an asset class perspective. Here is an overview of each respective asset level as well as a summary of key changes from the prior quarter:

Key Changes From Last Quarter

• Reallocated ~6% of overall portfolio to US Total Bond Market Index Fund via inner 401(k) transfer
• Continued semi-monthly investments into International Stock Market Index fund via 401(k) contributions
• Initial and subsequent investments into eREITs via Fundrise

Cash: This includes cash across holdings in our investment portfolio – NOT bank accounts, etc. We don’t have much control over the cash figure held inside our INVESTMENT accounts once we’re invested in a fund; we’re primarily invested in Vanguard Mutual Funds and many funds hold a small percentage of cash in order to cover redemptions or withdrawals.

International Bonds: We’re very, very light in this area (as of now). If we do seek to gain additional exposure, it will likely be via an index fund held if a retirement account. At the moment, we do not hold any individual bonds.

US Bonds: We hold a portion of our short-term emergency savings in a corporate-grade bond fund (which also has check-writing privileges). The rest of the US bond allocation had been made up from a balanced fund that we hold in a taxable account. However, as noted above, reallocated ~6% of overall portfolio to US Total Bond Market Index Fund via inner 401(k) transfer. This was meant to rebalance our portfolio to be aligned closer to our target allocation model.

Alternatives: Roughly 24% of our portfolio is alternatives, of which the vast majority is real estate exposure via a real estate investment trust (REIT). This particular REIT holding is currently 100% of my ROTH IRA account. The remaining ~1.0% of our alternatives allocation is composed of various non-real estate holdings across a number of funds we hold in retirement accounts. As noted above, we also completed the initial and subsequent investments into eREITs via Fundrise; we’ll likely continue to increase our holdings in the coming months.

International Stocks: We’re currently under weight from where I’d like to be in this area, so my current 401(k) contributions are all going toward a single, low-cost international index fund. This area will continue to grow with the semi-monthly contributions. My wife’s workplace retirement account contributions are also going toward an international fund (small-cap index). Our international exposure is all held in retirement accounts.

US Stocks: Currently our largest allocation, US stocks form roughly 50% of our portfolio. Over the last 2 years, I’ve consolidated the majority of our pre-tax retirement savings into large cap value and large cap core equities seeking moderate income with growth.

As mentioned, we had tapered back our retirement contributions in US Stocks with the aim of increasing our taxable investments. However, we still wanted to purchase additional shares via reoccurring dividend distributions within the retirement accounts. We’re looking to increase our exposure to mid- and small-cap companies in our retirement accounts – as well as in a few individual securities in a taxable account (still less than 1-2% of our net worth due to the concentrated risk in a limited number of securities).

Summary

Overall, we’re still extremely light on fixed income (i.e., bonds), but we plan to gradually increase holdings in the coming years – this quarter’s shift to approximately ~10% of our portfolio had been planned. We also had saved very aggressively during the financial crisis toward retirement, and we’ll continue to make retirement a priority; however, we’re attempting to find a balance between short, medium, and long-term goals. We’re also working to understand the importance of leveraging different account types, diversifying across & within asset classes, and working to create multiple streams of income.

Readers, how are you progressing on your financial journey? What plans do you have? Any detours or potential sprints along the way?

Related:

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

How We Got To Averaging +$1,000 a Month In Passive Income

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

BD’s (Semi-) Automatic Ecosystem

BD’s Apps & Tools

Passive Income & Portfolio Updates

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