We made it through 2020. Too bad 2021 is worse so far. I hope we can get through the next couple of weeks without too many incidents. I look forward to things being boring for a while.
Before I fully switch into 2021, I need to finish off the financials for 2020. As always, I’ll add some personal anecdotes, so you don’t fall asleep with the boring financial writing.
December was filled with birthdays and Christmases. Instead of doing Four Christmases like we usually have to do, we only had to do a couple. It’s hard to find silver linings in the pandemic, but running to a couple of different states and getting back after 1 AM is tough.
(Traditionally, we read a few Christmas books before bed to get nice and tired for Santa.)
To help with the rising cases after Thanksgiving, Rhode Island had a “pause” and scaled back some businesses at the start of December. The kids’ school didn’t shut down and while some other grades were sent home, they continued without an actual case. (They only sent a grade home if there had been a report of a “close contact.”) The pod set-up seems to be working well. So far (through Jan 12th), we’ve only missed a total of 5 in-person days (replaced by 4 at-home days) between both kids. I don’t know if I’d say that there’s a light at the end of the tunnel for them (since vaccinations are far off for 8-year-olds), but as we get to better weather and vaccines things will be better for them as well.
When things opened up, The kids got to eat some Pikachu pancakes, before doing to a Launch trampoline park. It’s hard when a kid can’t do a birthday, so this was a substitute. I think it worked better than the car parades of last year that were so depressing.
Pika! Pika! Don’t Eat Me! Nooo!
We also a staycation at a local hotel. One of the great things about living in a summer resort town like Newport, RI is that everything is built for the influx of people in the summer. So in the winter, restaurants and hotels are empty. We had the whole pool to ourselves for a couple of hours. Later we hid objects around the room and played “Hot or Cold.” It’s good to switch things up if you can do them mostly safely during the pandemic.
This normal-looking nautical lamp amazed this future engineer.
That’s enough lead-in… let’s start the Passive Income report. I used to call this the Alternative Income Report, but everyone loves passive income better. While I transition to the new terminology, there may be some “alternative income” mentions including the FAQ. If you are a new reader, you’re going to want to refer to my Alternative Income FAQ as you’ll likely have a lot of questions.
We didn’t have much snow over the last couple of years but got an 8-inch storm in December.
The way I calculate these numbers requires that long explanation – it isn’t intuitive at all. The reason why I do things a little differently is that this catalogs a journey. For example, we don’t have passive income from our rental properties while we are paying down their mortgages. Instead, I calculate the percentage of equity we have to show where on that journey we are. Each month you see that the bank owns less and we own more. When we get to owning 100% there will be no mortgages and all that rental income can be used for living expenses.
Lazy Man’s Passive Income – December 2020
I categorize our passive income into 3 main sources that are largely represented in my passive income pyramid. For this report, I ignore the bottom section, “career/job” – that’s not passive at all. (I do 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 “somewhat active” income. I leave real estate and investment income as their own separate main sources of very passive income.
1. Blogging + Dog Sitting Income
December was a very bad month for blogging income. I usually get a lot of advertising inquiries a month, maybe 8-10 or so. I don’t remember getting a single one in December. I’ll need to figure out how I can do better. For now, I’ll just have to deal with it.
We found the Christmas Star! Maybe when the next 800-year event happens we’ll remember to bring our telescope (and have a good one – ours is fairly cheap.)
Additionally, COVID has killed the need for dog sitting this year. We got a couple of stays in December and due to holiday rates, it wasn’t horrible. I think dog sitting is going to be down until summer. I’m hopeful COVID will be down with vaccines and everyone getting more time outside. Summer is a big vacation and tourist season for us, so if that happens I can make some money again. If not, it’s no big deal.
In November, dogs and blogs combined for a total of $1,021.93 – the lowest in years. In December, it was:
Total Blogging + Dog Sitting Income: $1,036.52
That’s really poor, but at least I didn’t have to do too much work for it. If I tried to calculate an hourly rate it would be really, really good. Just as importantly, I enjoy writing this blog. The dogs that we are sitting are regular customers… and great dogs. It’s a good combination.
When there is some dog sitting my kids can pitch in to help. My 8-year old is extremely good with dogs at this point. He can feed them, let them out, and play with them in the yard. My 7-year-old is good too. This help means that I can pay them a legitimately earned income (a small 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. I want to get them more involved in blogging, taking pictures and things like that, but it’s going slow. They get a lot of school work and home work.
(Note: The blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)
2. Rental Property Income
We recently sold a condo and bought a new one that’s closer to us. It’s much easier to manage. We got new tenants in January, so finally we’ll start getting money from it. I’m very excited about the tenants that we got. They volunteered to paint the whole place and do other improvements. We weren’t expecting this, but it looks great now. We’re giving them a big discount on the rent – it’s the right thing to do.
Santa comes down every street in our town over a couple of weeks. It’s hard to get a good picture of him, because he’s so busy, but I was able to catch this.
As for December’s numbers, Zillow’s estimates of our properties were up – always a good thing. We paid down the mortgages as we always do. We gained around $60K in equity in 2020, just like we did in 2019. It is difficult to deal with tenants, but I like to think of those equity gains as a $60,000 salary. We can’t spend the money, because it isn’t liquid. Still, the “work” for that $60,000 is pretty minimal.
This month we went from 60.71% to 61.55% ownership of the equity in our properties. That’s a really nice move forward. Previously, I calculated that, after insurance, property taxes, condo fees, and estimated maintenance we’d make $3,325 a month. That number represents our net gain. I recently updated this with the new property and it looks like we’ll be at $3,387.50 – a minor difference.
Bored kids are imaginative kids, I’m told. Here they build a fort in our living room, which carried on up in their bedrooms.
If you multiply our expected net rent $3,387.50 by the amount of equity we have (i.e. where we are on our journey) 61.55% you get $2,085 in estimated monthly passive income. When I started tracking this (beginning of 2017), we only owned 36.4% of the properties and they had lower rents. The math worked out to $1,174 back then. So in 47 months, we’ve seen the number grow $911/mo. That’s good passive growth in 4 years.
As the years march on, the ratio will grow to 100% of a rent that should net $3,387.50 monthly after expenses. Since rent is inflation-resistant, we can raise it as costs of living go up. We don’t have to factor in inflation like other investments. So we can think of it as $40,800/yr. of income in today’s dollars buying the same value of stuff in the future. That should be enough money for us to live on with our own home paid off (plus our solar panels, frugal shopping habits, and military healthcare.)
In the previous report, the rental property income was $2,056.
Total Rental Property Income: $2,085
3. Dividend Income
For this section, I assume we will earn a 2.5% dividend yield on our holdings. That could be from a high-dividend ETF or from simply holding strong companies that have a long history of dividend growth. There are some income investing here. We can also look at making passive income with dividend kings. If I wanted to simply retire on this dividend income, I would get Sure Dividend’s newsletter to try to get closer to a 4% average dividend yield. That link to the newsletter has a special discount rate and in full disclosure, I make a few dollars if you sign up for it.
The market has been doing great – it’s just been a big bull market. Some of the stocks that I picked have done really well. I wouldn’t have expected Snapchat, Pinterest, and solar panels to be up 5x, but they have. Once again, our portfolio is at an all-time high. We’ll see if investments can continue to grow. The stock market economy doesn’t seem to care about COVID because it’s looking to the future with vaccines.
We continue to get a profit-sharing check since I bought (a lot of) a company. The business is doing well. It’s actually almost ideally positioned in this pandameic due to its virtual nature. The investment income from this is essentially the same as dividend income. It is taxed differently, but for the purposes of this report, it makes sense to group together all stock ownership in this bucket.
Total Dividend-ish Income: $3,441
Last month, it was $3,323 and we jumped up again. We are now far past the pre-COVID number highs. This number rarely goes up much (since it’s a small percentage of our nest egg), but this was another month of extreme gains.
Kids at the Launch trampoline park. It’s kind of weird to social distance while bouncing around, but it was mostly empty for a lot of the time we were there. The kids said it was the best time they’ve had in forever… which may be 2 days in “kid time.”
Annualized, this monthly $3,441 is $41,296. If our mortgage was paid off, we might be able to live on this by itself. However, because most of our investments are in retirement accounts, we can’t use much of this potential income for now. (We can use the profit-sharing check as it goes straight to our checking account.) We’ll let this investment continue to compound for another 15 years until we are 59.5. Then we’ll have to see if we want to tap it or let it continue until we are required to take some of it at age 72.
Very Close to Passive Income
Our “very close to passive income” is a combination of rental property income and dividend income. If there were some royalty income from books, movies, or music, I’d include that as well. I’m too tone-deaf to have a rockstar music career, but maybe I’ll write a book someday.
Kids love Just Dance on the Nintendo Switch. I like a video game that gets them moving.
The stock market goes up and down fast, even more so nowadays. That makes the dividend calculation fluctuate a lot more than it normally would. We don’t know if companies can reliably pay dividends anymore. Without customers and profits, many companies have cut their dividends. However, the stock market is looking ahead to summer 2021 with a lot of vaccine and outside time.
The rental property income typically keeps going up because the mortgages are always getting paid down every month. Unless there’s a housing market crash, this should continue to happen. We haven’t seen any kind of crash… instead the housing market is booming.
For a few years, I’ve been saying:
I love having both types of income working together for us. I think everyone interested in FIRE should have stocks and real estate income streams. The diversification gives me great confidence that we’ll be better prepared than most people in the case of an unfortunate economic event. We’ll still likely get rent checks if the stock market crashes. We’ll still get dividend checks if a tenant is late paying for awhile. Of course a bad economy may impact both at the same time, but that’s what an emergency fund is for.
Finally, our 8-year-old stayed up for the New Year. His younger brother had to the good sense to go to sleep hours before.
We are almost a full year in of a ginormous unfortunate economic event (it’s worse outside of economics, but for the sake of this article, I’ll stick to economics). Stocks went down a lot, but then went back up. Real estate has held steady. Overall, the plan keeps rolling along, even during COVID-19.
While the stock market is doing well, the real economy is very bad. It used to be terrible, but some people are getting back to work and some jobs are coming back. We’re finally getting a president who won’t ignore COVID and hope it disappears. We’re also getting a president who is going to start to reverse the climate change disaster that sees so many natural disasters ravage the United States. Even if you are a heartless soul who doesn’t care about the people losing everything in fires, you should be able to agree that American business works best when it literally doesn’t have to put out fires.
Very Close to Passive Income: $5,526
Last month it was $5,379. The $5,526 extends our all-time high.
This would be over $65,000 a year of almost completely passive income. What’s better is that there would be no need to touch the investments themselves. We wouldn’t have to sell stocks or get a reverse mortgage. Property maintenance and property taxes for rental properties are already factored in. We would still have all the underlying assets (property, stocks, etc.) and be able to pass these on to the kids for them to build on – unless we choose to draw them down for more fun, charity, or other spending.
This “very close to passive income” has grown from $2,354/mo. in January 2017. It’s worth noting that, once again, these are fudged numbers that aren’t “real” yet (except for the profit-sharing check). We’re just about at four years of tracking this number, and we have gained more than $3,000 in passive-ish income. I wonder if we can get to $8,000/mo. in passive income by the start of 2025 (which will be another 4 years). I think that would be too aggressive, but it would give us something to hope for.
Final Passive Income
When you add up “dogs and blogs” to the “very close to passive income” you get:
Passive Income: $6,562.52
Last month it was $6,400.93. I’d like to see this get closer to $8,000 in 2021, but I need a plan to add something new – it doesn’t look like dogs and blogs is going to get me there. For now, I’ll just be happy that with four different income streams (and two consistent ones), there isn’t much room for everything to drop.
This $6500+/mo income is $78,750.24 a year. That largely hypothetical annual income for writing on a blog, taking care of one dog, and investing is really nice. In the long term, $78K would be a lot more income than we’d need – given our necessary expenses for the next 45 years. Of course, those necessary expenses aren’t going to cover all our spending, but it’s a large percentage of it.
As 2020 has proven, you never know what bad news is lurking around the corner. This preparation gives us the financial flexibility to fight it.
None of the numbers here include my wife’s bread-winning pharmacist income, her vested military pension (more passive income), or the freelance work I’ve been doing over the last couple of years (which isn’t passive at all). That’s the fuel that drives the passive income engine – it allows us to live well and invest. My income doesn’t match my wife’s, but I’m good at stretching a dollar in almost all our spending.
As always, I’m still hoping to write a book someday. That would add some more passive income. My wife will probably get her book out first. She’s had an incredibly interesting life until she met me – I am so boring. I may tip my toe into self-publishing sometime this year. I would love to talk to a real publisher, but I don’t want to take on the “job” of writing. That’s probably a deal-breaker. If you know someone who I could talk to contact me.
My favorite thing about the graph below is that it doesn’t dip down too far. It’s been above $6,000 for a while now. Though we are getting close to dipping below that $6,000 mark. If it dips below $6000 and touches $5000, we’ll have to examine some things.
(Once again, the blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)
Net Worth Update
My net worth updates aren’t very exciting as I don’t share the exact numbers. That’s why it’s just a footnote here.
I truly believe that net worth is one of the most important numbers in personal finance so it is worth sharing in some way. Showing relative growth can be useful.
Like most investors in December, our net worth did extremely well. We saw it jump 3.58%. For the year overall, our net worth is up 26.01%. If you didn’t know better you might think 2020 was another boring, great financial year – a typical saving and investing plan for us. In fact, growing our net worth 26.01% in a year might be above average. With the Rule of 72, we’d double our net worth in around 3 years.
Diversification helps a lot in bad times. Even when the stock market was way down, we were still grounded with our real estate. We can’t control the market, but we can be happy that the amazing river of compound interest has been working well for us over the years.
I feel it’s important to acknowledge that everyone is in a different place in their financial journey. I’ve been blogging about personal finance for 15 years. FIRE wasn’t a “thing” back then, but it’s in the news a lot now. We naturally are further along in that journey than some younger readers who may be just starting out. 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 11 of blogging (year 13 of early retirement planning). Please try to use it as motivation for what may be possible (depending on your circumstances and market luck) over 10-15 years.
There’s a big wild card in calculating our net worth. Now that my wife’s pension is vested, it’s reasonable to ask whether to include a pension in your net worth. I decided that it does make sense to include it. She could have earned more direct monetary compensation 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. In the end, it seems my wife’s pension may be worth $2.3 million. However, like most of the money mentioned in this article, this isn’t money we can spend right now.
Because the pension would dominate our net worth, I’ll note two separate numbers in my personal spreadsheet. I don’t share the numbers anyway, aside from these hints, so I don’t think it should matter much to you. It’s not like I’m suggesting that you might want to make a financial-based decision on a pension.
I always end this article by asking how your last month went. I know that COVID-19 is making everything difficult. I hope that some of it is getting easier. I’m sure that for many the kids going back to school, in whatever form, represents new challenges and anxieties. Feel free to use the comment space to vent, I try to give a thoughtful reply to every comment I get.