We’re at the point in the new year where I’m no longer writing 2022 on my checks. Wait, I don’t write checks – all my money has been automated for years. Well, at least I generally know what year it is now. This is an excellent time to review those 2023 goals and resolutions.
Usually, I use the Super Bowl as a reminder to get stuff into gear for Valentine’s Day. That wasn’t very helpful this year. Valentine’s Day snuck up on me very quickly. Fortunately, the local Navy Base has a fancy dinner for a reasonable price. I got reservations a couple of weeks ago, so at least there’s a bit of a plan.
January was a busy month for us. Half the month, we renovated the house. Clarification, we paid for people to come to renovate the home. We had 90% of the interior painted and fresh pet-friendly carpeting upstairs. That required shuffling everything from one room to another while they worked.
We celebrated two birthdays. Our youngest turned nine, and we had lunch and a trip to an arcade with a few friends.
[This is actually both our sons, but the other friends were there.]
Our dog celebrated his 14th birthday. I brought him to the beach, and a wave crushed him. It surprised me too. It wasn’t the most fantastic birthday present. We got him a new vet recently, so we’ll see if that helps him to get to a 15th birthday.
We had our usual bunch of events. The kids continue their martial arts. They were getting bored of it, but they introduced swords (big wooden sticks for them) this month, and that got them excited again.
My oldest finished his Lego Robotics class with a team win of the Core Values trophy at the state championship. It’s funny because he was the only fourth grader, and I felt like he was mostly on the sideline sitting and watching the older kids do everything – not award-winning sportsmanship. My youngest just started his robotics, and that’s more his thing. I’m a co-coach, and most of the kids are way more advanced than the Lego Explore curriculum.
Let’s start the New and Improved Passive Income report. I’ve streamlined this a bit, so hopefully, it will be a faster, easier read. I’ll try to continue to trim it down through the year.
However, that idea didn’t catch on as it did when I used it back in 2008. Everyone loves “passive income” better. If you are a new reader, you’re going to want to refer to my Alternative Income FAQ as you may have some questions about the math that I’m going to use in this post.
The way I calculate these numbers requires that little explanation – it isn’t intuitive. I do things a little differently to show the journey. For example, we don’t have much real passive income from our rental properties. We still have mortgages to pay off. Instead, I calculate the percentage of equity we have to show where we are on that journey. Over time, the bank owns less of the properties, and we own more of them. There will be no mortgages when this number gets to 100%, and all that rental income can be used for living expenses.
When calculating the percentage of rental income, I take the rent (minus estimated expenses) and apply it to the portion of equity we own. Think of it like you and a friend owning a property 50/50. This would be how you’d handle it, with each of you splitting the profits at the end 50/50. If your friend is the bank and it owns 80%, you should only count on 20% of that net rental income. We used to be in that 20% range, but now it’s closer to 75%.
Lazy Man’s Passive Income
I categorize our passive income into three primary sources that are represented mainly in my passive income pyramid. For this report, I ignore the bottom section, “career/job,” – that’s not passive at all. (I have some income in that area, but that’s not the focus of this report.) I combine dog-sitting and blogging into one section of my “somewhat active” income. They are a little passive because I can make money even when I’m not immediately tending to them. I can do other money-making activities while I board dogs. When I’m on vacation, some blog money still comes in. I combine real estate and investment income as their separate main sources of very passive income. This way, if you want only to count those, you can do that.
New for this year, my passive income is only going to be 50% of blogging and dog-sitting income, 80% of real estate, and 100% of dividend income. That rewards types of income that are truly passive and punishes my quasi-passive sources like blogging.
1. Blogging + Dog Sitting Income
January is always my worst month with blogging and dog-sitting. Most people are finished with their holiday travel and don’t need a lot of dog boarding. Advertising agencies are resetting their budgets, so they aren’t spending much on bloggers. I would be nervous, but now I recognize that it happens every year.
Knowing that January was going to be a slow month, we closed the dog boarding business for two weeks so we could paint much of the interior of the house and install new carpeting. We ended up turning away significant business. Oh well. As my wife says, “We need to renovate sometime.” I took the opportunity to raise prices by about 7% – we had too much demand, and I’d rather have fewer dogs pay more.
The blogging income for the month was the lowest in years. Yikes! Blogging is trending towards zero while dog boarding goes up.
In December, “dogs and blogs” combined for $9,168.65. In January, it was:
Total Blogging + Dog Sitting Income: $2,226.37
Even with that big drop, I’m happy with the number. It was almost a perfect storm of terrible circumstances, but that kind of money still works well with our investments and other income. Sometimes it’s good to test the bottom.
My kids help with the dog sitting. My 10-year-old is extremely good with dogs at this point. He can feed them, let them out, and play with them in the yard. He’s spending more time in front of the clients as a helper at pick-ups and drop-offs. My 9-year-old was a little slower to develop dog skills, but he’s carved out a household niche catering to the smaller dogs – he just loves them.
Their help means I can pay them a legitimately earned income (a percentage of the overall dog-sitting income). Because the income is earned, they can save money in their kid Roth IRAs and it will be money that they’ll never pay tax on. Here’s why kids should start a Roth IRA as soon as possible.
2. Rental Property Income
Our rental properties have been very boring for several months. With mortgage rates high, property values have come down a tiny bit. We’re not seeing the great appreciation that we saw last year. However, we continue to pay down the mortgages every month. The result is a lot like running in the place – we aren’t going very far.
We might be able to raise rents this year. Our rents are far below market rates. Unfortunately, it is a tough time for a lot of renters, so we don’t want to move up rates too much.
In the last month, we went from 75.55% to 75.76% ownership of the equity in our properties. That seems like a small amount, but that’s what happens month-to-month. I calculate this number as a fraction, with equity we own as the numerator and total property value being the denominator. If we owned both of our rental properties with no mortgages (100% of the equity), we’d make about $2,200 a month after insurance, property taxes, condo fees, and estimated condo maintenance.
[My newly 9-year-old can build anything. Here he’s showing off the Lego Minecraft kit he built in the physical world and then the virtual one in Minecraft world.]
If you multiply our rents of $2,200 by the amount of equity we have, 75.76%, you get $1,667/mo. in estimated passive income. Last month it was $1,662/mo. Obviously, the $5 doesn’t matter much. It could maybe buy a cheap streaming subscription. However, it adds up over time.
When I started tracking rental property income this way (January 2017), we only owned 36.4% of the properties, and the properties had lower rents. The math worked out to $1,174 of passive income back then. In six years, it grew a ton. We sold our biggest rental property last year and invested that money in the stock market. It’s much more passive now. That was a strong driver as to why I started to count certain passive income sources as less valuable than others in this report.
When we get to 100% ownership of the two properties, they should bring about $25,000 after expenses. Rent is inflation resistant as it’ll rise over time. That means that even though this is $25,000 in today’s dollars, it will still have that buying power in the future.
Total Rental Property Income: $1,667
3. Dividend Income
For this section, I look at our stock market investments. I assume we could earn a 2.5% dividend yield on those investments. That assumption is a conservative number that helps us think about what kind of cash we can expect. It should be easy to get that 2.5% number as we could simply put all of our portfolios in a high-dividend ETF. For example, the high-yield ETF, HDV, is currently paying a 4.17% yield.
With today’s interest rates, a 2.5% yield seems ridiculously low. I need to remember that interest rates could go back to where they were a year ago.
Most bloggers use the actual dividends they earned that month. I have quite a few accounts, and I’m too Lazy to add up the dividends on them. Even if we aren’t getting the 2.5% number now, we could always move the money around from growth to dividends if we needed to live off the cash flow. A vast majority of our money is in retirement accounts, so cash flow isn’t important to us now. I also combine all the taxable and retirement account numbers. It’s too much work to separate them out.
[My dog wasn’t happy with his unexpected polar plunge!]
We continue to get a profit-sharing check since I bought (a lot of) a company. The company is doing well, and they occasionally throw an extra profit-sharing check to me. The investment income from this is essentially the same as dividend income. It is taxed differently, but for this report, it makes sense to group all stock ownership in this bucket.
I found an error in my spreadsheet. It seems that I was double counting one account for a few months. I’m not going to fix all the old posts, but it was easy enough to fix the charts here and going forward. With my new system of only counting 80% of real estate and 50% of dogs and blogs, it is another reason not to look back.
With the market recovery, our dividend-ish income grew quite a bit:
Total Dividend-ish Income: $4,031.00
Last month it was $3,847. The easy math shows that it was up $184. That’s a very big gain for one month. I don’t know if we’ll have too many of those this year. I guess that’s part of the beauty of the situation though – no one knows what to expect with the markets.
In January 2017, the dividend income was at $1,180/mo. It’s been a tremendous six years. If you think about it, that amount of dividend income couldn’t offset some expenses, but it wasn’t enough for many people to say that they live off of that completely. We’d have to make some significant lifestyle changes, but the $4,000 income is nearly $50,000 a year – enough for us to live fairly well if we paid off the small remaining part of our mortgage first.
For the 35th month in a row (?), we’re looking into estate planning, but they gave us a lot of paperwork to do before we can move forward. I’m still not making any progress on this. For the first time in about 15 months, I got to a point where I thought I might be able to get the paperwork back out. One of my main goals for the year is to work on this, so hopefully, it won’t just become another wish.
Adjusted Passive Income
I used to combine real estate and dividend income into “very close to passive income.” However, now I’ll simply add up the 50% dogs/blogs, 80% real estate, and 100% dividend income. This makes things a lot easier.
Dog/Blogs: $2,226.37 – Adjusted to $1,113.19
Rentals: $1,667 – Adjusted to $1,333.60
Dividends: $4,031.00 – Remains at 4,031.00
Dogs/Blogs – Blue Line
Rental – Red Line
Dividend – Yellow Line
Total Adjusted Passive Income: $6,477.79
In the past, that used to be much higher. However, this is more accurate. It’s also particularly low because January is a slow month.
Annually, that’s $77,733.48. That’s significant because, at the start of this blog, I aimed to have around $75,000 in passive income. That was my definition of “winning the money game.” It would be enough to cover our needs and most of our wants.
I think it’s very useful to have different income streams. As blogging income becomes more difficult, dog boarding income has grown to supplement it. For a long time, real estate didn’t grow much at all; then, in the last couple of years, it grew a ton. The stock market grew for more than a decade from 2010 to 2021 but had a little setback last year.
[I had this Hamilton Beach Sandwich Maker gathering dust for years. In January, I made breakfast for myself and a school lunch for my oldest at the same time.]
The chance of all the income streams falling on hard times is low, but certainly not impossible. If we had another event like the Great Recession in 2008, they’d all be impacted quite a bit. In that case, we’d have to rely more on active income (the other 50% of our dogs/blogs, 20% of rental income, and other jobs) or rely on savings for a while.
It’s also important to remember that these numbers aren’t “real” because much of the money isn’t liquid. We can’t spend those retirement investments without penalties. We can’t access the equity we have in properties without opening a HELOC. There are some money moves around these, but it’s not worth making any of them until my wife retires.
You’d think we’d feel “rich” having won the money game. We don’t. Our social circle tends to have generationally rich people. However, we are “rich” relative to many people’s circumstances. Money is relative. It’s nice not to have to worry about emergency bills and make reasonable splurges.
[The blue line represents the total adjusted passive income. The Red Line represents the three-month average.]
The three-month average in January 2021 was $5,605.67. In January 2022, it was $7,612.64. Now in January of 2023, it is $8,984.80. Those are some good gains for the worst month of every year. I hope to get that adjusted passive income to average $10,000/month for the year 2023. I had just about ended December at that high, so we’ll see how it goes all year on average.
That kind of income for writing on a blog, taking care of dogs, investing, and landlording is awesome. I don’t know how long dog boarding will last. It was a lot of work last year – this year has been easier with the lighter schedule. I think that with dog boarding, either the market will change or I’ll change. Perhaps I’ll want to travel more. Perhaps, I’ll want a different challenge. I’m on my third career (software engineering, blogging, and dog boarding), so it would be naive of me to think it might be my last.
None of the numbers here include my wife’s bread-winning day job as a pharmacist or the minor freelance work I’ve been doing over the last few years – neither is passive at all. When my wife retires, we can count her vested military pension as more passive income. A pension is like a passive income cheat code. They are so rare nowadays.
For now, this active income (including the dog boarding) is the fuel that drives the passive income engine – it allows us to live well, get our kids a top education, pay off our mortgages, and invest. My income doesn’t match my wife’s, but the flexibility gives me the time to stretch almost every dollar in much of our spending. It also allows me the flexibility to bring the kids to school and to after-school activities.
Net Worth Update
My net worth updates aren’t fascinating as I don’t share the exact numbers. That’s why it’s just a footnote, not its own article.
I truly believe that net worth is one of the most critical numbers in personal finance, so it is worth sharing in some way. Showing relative growth can be helpful.
In January, our net worth was up 3.16%. We’re now about half a percent from our all-time highs. That’s great, considering that the markets are still off their highs by nearly 10%. I feel like I can truly say that we’re in the best money situation we’ve ever been in.
[The sportsmanship award is almost as big as the biggest overall trophy!]
There’s a big wild card in calculating our net worth. Now that my wife’s military pension is vested, it’s reasonable to ask whether we should include it in our net worth. If the U.S. government didn’t back it like treasuries or FDIC, I may feel I should account for some uncertainty. I decided that it does make sense to include it. She could have earned a larger immediate salary if she didn’t work for the government. That would have boosted all the numbers across the board. Calculating pension value is not easy, but here’s the best way to know what a pension is worth.
It’s important to recognize that everyone is in a different place in their financial journey. I’ve been blogging about personal finance for 16 years. FIRE wasn’t a “thing” back in 2006, but that’s been my goal since the first sentence of this blog.
We naturally are further along in that journey than some younger readers who may be just starting. Many of those readers are saddled with huge student loans that we didn’t have to deal with. If you are one of these readers, I hope you won’t be discouraged by some of the numbers above. I didn’t start many of these graphs until year 10 of blogging and early retirement planning. Please try to use it as motivation for what may be possible (depending on your circumstances and market luck) over 15-20 years.
How was your month? Let me know in the comments.