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.
September 2017 Update
I love March, June, September, and December. The other 8 months have their perks as well, but the third month of each quarter means quarterly distributions. As the majority of our retirement and taxable investment accounts pay distributions on a quarterly basis, the first or second month of each quarter always looks pathetic (for now). But not this month – it’s quarter-end!
From the prior quarter, we had a 6.1% increase in passive income. Year-over-Year (YoY) vs. the same quarter last year, we had a 21.3% increase in passive income. This is in part due to continued positive market gains, but all distributions continue to be reinvested; we love the “snowball” effect of additional dividends and interest buying additional shares. As mentioned in the last 2 months, we also worked to increase available cash in our primary Ally Bank Checking account to cover planned family travel in October.
The other change continuing from the last two months was the creation of our Fundrise account, which had a promotional minimum of $500 to open an account (vs. the usual $1,000). As mentioned in August, we swept the initial $500 from our Acorns account, which had accumulated over $650 via round-ups in the first 8 months of being opened – loose change that we barely noticed getting deducted from our checking account on a weekly basis. Overall, I’m looking to see how the Fundrise investment goes and consider investing additional sums to establish a longer term passive income stream. We also executed our plan to invest an additional $1,000 in September.
We also rebalanced a relatively significant portion of our portfolio (see Investment Portfolio Allocation below).
Related:
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:
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.
