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.
November 2017 Update
I had a change of heart toward retirement in October. Nothing changed yet in November or will likely have a significant impact on monthly passive income at least. Yet. 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.
While October did bring our very first quarterly distribution from our initial Fundrise investment, November was a really slow month. Aside from monthly interest in one of our taxable accounts, nothing exciting happened – only anticipation building up for the final month and quarter of the year: nearly all our funds and individual holdings pay out dividends in the last month of each quarter.
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. 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.
Overall, we received $15 in passive income in November (-28.5% YoY) – a 0% increase from the second month in the prior quarter. As we’d reallocated some of our emergency savings into a different fund a few months earlier, our passive income this month was about on par with the second month of prior quarters in 2017. We also invested another $1500 into Fundrise, so we expect to see the first month of each quarter going forward increasing passive income.
Upcoming! We received requests for additional detail on our holdings and allocations. I’m reviewing ways to better show some of our existing holdings, so more to come as part of the December 2017 passive income update.
Related:
FTW! Is it Possible to Invest for Today AND Tomorrow?
BD’s (Semi-) Automatic Ecosystem
Passive Income & Portfolio Updates
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.
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.
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 97% 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):
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
Passive Income & Portfolio Updates
Our favorite free financial tool is Personal Capital. We use it to track our net worth, manage our spending & savings, and to monitor our investments. It’s simple and free to use.
Hi Mike, Nice post and summary of your situation. I like your use of Vanguard for the IRAs. Great tax free/tax deferred growth with a low cost provider to accelerate returns. Looks like you have a very good handle on your asset allocation. Not only where you are at today, but where you want to take it in the future and how to get there. Although, the substantial allocation to REITs did catch my eye. Thanks for putting this together. Tom
Hi Tom – thanks for your feedback.
Your comment on the REIT allocation is very timely. I’m working on a post right now about our relatively substantial allocation toward REITs. Besides the appeal of usually higher reoccurring income and moderate-to-long-term capital appreciation, part of the reason comes down to our view of the housing market from where we have lived and where we currently live now.
More to come soon. Thanks, Mike
Hi Tom – post is now up:
https://www.balanceddividends.com/landless-landlording-how-and-why-we-use-reits/
hey mike. i was just reading something interesting on 401k millionaires who were too young to access that money penalty free. from everything i have read you would want 5 years of typical living expenses in order to tap that money at a young age via a roth conversion ladder. it’s good you’re looking at it now as a young person.
i was meaning to get back to you on the subject of preferred stocks. i’m using PFF and SPFF as bond proxies but both are down from where i bought them. they’re ETF’s that yield about 6 and 7% and pay out monthly. if i needed to liquidate them my upside after a year wouldn’t be near those yields with the price drops but they’re in a place where i have other assets i could liquidate if necessary. that being said, i might eventually want to sell them so i keep an eye on the prices.
Hey Freddy – thanks for your comment.
Interesting point about the 401(k) millionaires and the Roth conversion ladder. We’re not there yet, but I could see that being a point of frustration prior to being 59 & 1/2. While there are ways to potentially access funds in a 401(k) without incurring the 10% penalty prior to then, we’re definitely taking into account our taxable vs. non-taxable accounts.
Related: https://www.balanceddividends.com/balancing-account-types-to-balance-lifes-unknown-milestones/
Thanks also for the follow-up on the preferred securities. I also took a look further at some potential ETFs, as they provide greater diversification (and, quite frankly, I don’t have the time nor the skill to pick a basket of individual securities). Not certain if we’ll utilize any yet.
For PFF and SPFF, as well as other preferred ETFs, in general, do the monthly payouts get categorized as qualified or unqualified dividends? I guess it wouldn’t matter as much in a non-taxable / retirement account, but it’s a point of consideration depending on one’s respective investment needs.
i believe them to be qualified dividends so long as you’re held them 90 of 180 days, similar to long term/ short term rules. usually if you’re holding them awhile they’re qualified and will be taxed at 15% for most of us.
i’ts good you’re inspecting that asset allocation now before you have the party and quit your job and realize the split wasn’t quite what you needed. i just wrote an article called “do it before it’s an emergency” that says that about a lot of things in life. rock on!
Hey Mike,
New reader here. I do enjoy looking at the spreadsheets to see how you guys are progressing in you passive income goals. I like particularly the discussion regarding emergency saving vs investing as I have had to do re-configuring in my own portfolio to that effect. It also fits nicely into a discussion regarding another post of yours about investing for today and tomorrow and how assets can get trapped. I have tried to get Sam at FS to do a post on that but haven’t seen it yet.
Anyway, look forward to your posts.
Regards,
J
Hey Jackal –
Thanks for your interest and the comment.
I appreciate the input; I’m trying to do a better job at looking at reoccurring themes between certain posts. Regarding allocating and accessing funds via different account types, the personal “ah ha” moment came for us a few years ago. It helps us stay motivated knowing that there is hopefully a large pool of available funds toward the end of the journey, but we can also stop and enjoy things along the way.
Also, I just briefly checked out your site. The Cleveland Browns post made me laugh out loud; Mrs. BD is from Cleveland, so she also knows the pain and suffering of being a Browns fan. She has a t-shirt with “the factory of sadness” and the Browns’ stadium on the front.
Thanks again for your comment.
– Mike
Thanks for the response Mike. I will be frequently visiting now. Glad you enjoyed the Browns post, I am a Redskins fan, so I am starting to feel the pain after the glory days of the 80s and early 90s.
Hey Mike, nice summary, also looking forward to hearing why the heavy allocation to REITs.
Hey DM – thanks for your comment.
I plan to have the REIT post out in a couple days. I’m tempted to wait until December’s distributions pay out, but I’ve been working on the post for a while.
– Mike
Hey DM – post is now up:
https://www.balanceddividends.com/landless-landlording-how-and-why-we-use-reits/
I’m 100% invested into U.S. stocks. I’m in it for the medium-long term. SO although I think the stock market will be choppy in 2018, I’m just going to ride it out.
Hi Troy –
Thanks for your comment.
Taking a long-term perspective makes sense. I just briefly checked out your site (will do further reviews soon! Your model building steps were interesting.
I also read your recent post and saw that you’re either 100% long or in 100% cash – just curious, how do you factor in trading costs, taxes, etc?
-Mike
$1000/month in dividends is no joke. It’s also a good plan working on having multiple streams of income. Keep up the good work!
99to1percent recently posted…How we increased our annual income from $0 to $160K+ to $400,000+ https://99to1percent.com/increased-annual-income-0-400k/
Hi Tina – thanks for your support and comment! We’re slowly building up income streams beyond our traditional portfolio (stocks, bonds, etc.). It’s building momentum.
Thanks for the detailed share Mike! I appreciate it when people openly discuss their personal portfolios. There are so many times I read about “advisors” who tell you need to invest in growth, income, international, or real estate investments, yet the uninformed aspiring investor has no idea what any of that means. Yes they may have heard of the terms before, but they don’t know how to apply those terms to real sources of investments. By further elaborating (like you did) about index funds and REIT’s, it gives the uninformed investor a better starting place.
I have personally been over-exposed in U.S. stocks (via index funds) for about 3 years, and I am now diversifying into international and REIT’s (via index funds).
Thanks for the share, and I look forward to your next income report!
Hey Sean – thanks for the comments! Glad you enjoyed the post. Your payoff story on your car from 2 years instead of 5 is impressive as well.
On the portfolio details, thanks for your feedback as well. I enjoy reading content that goes into a little more detail occasionally (without over-complicating too much).
Thanks again. – Mike
Hi Mike, I’m a first time visitor. Looks like you have a solid approach to your investing. It’s terrific that you are already thinking about what account types your money is going into, as well as overall asset allocation. I look forward to your Dec. income report with additional details, and to visiting the site on a regular basis.
Hi Paul – thanks very much for visiting; I appreciate your comments. I just visited your site for the first time and will be following going forward as well. Your portfolio is very impressive – including the original core holdings you referenced via your initial DRiP efforts. Thanks again for stopping by. – Mike