I remember when I got my first full-time job the summer after my freshman year in college. For the first time, I got a taste of making money. The weekly paycheck felt nice as it rolled in. The hourly wage was much lower back then. I was making $5 an hour, but it was a better wage than working at a McDonalds, so I felt “accomplished”. That time was when I realized that giving my time for money was a good equation. If I showed up and did the work, I’d get a paycheck to cash on Fridays and get to buy things that I wanted. Yes, there were physical paychecks back then and we were just discovering direct deposits.
I always tell stories to my [younger] wife about my early years in the U.S. when people would line up at the bank every Friday afternoon and wait to cash a check. Imagine having to put another hour worth of effort just to gain access to your wages. Sometimes you would hear stories of people getting robbed of their hardworking money on their way out of the bank. Thanks to the technological advances, we have fewer of these instances.
My family didn’t use credit cards back then, so to do the grocery shopping, you had to cash that check. Need new clothes? Got to cash that check. You were lucky if you got paid on a Thursday because you could head to the bank during the evening and deal with a smaller crowd.
So while back then getting paid to do the work felt extremely encouraging for me, but the real power of wealth and work was unleashed when I discovered the power of passive income. Passive income is the sweetest income of all. It comes to you no matter what you’re doing in life. Whether you’re enjoying yourself or dealing with an unpleasant life situation, eating, napping or pooping. It can appear in any of your accounts at any time, sometimes when least expected.
And the journey began…
I started my passive income journey in 2006, when I began contributing to a 401(k). On the one hand, I was getting dividends in my 401(k) and on the other hand, I was paying more than I was receiving in bank loans and credit card interest. It took a few years to wake up from that and realize that I needed to change the equation in my favor. And to do just that, I needed to think like a bank or, better yet, like a real investor.
With passive income we’re able to work once for the money and, thereafter, have the money work for us. Our goal is to retire early and live off this passive income. Thanks to our extreme savings effort over the past 5 years, we reached financial independence two months ago and now have the option to live off passive income! We were able to achieve this milestone by concentrating on growing our income-producing assets, instead of buying depreciating assets and paying interest on them. That accelerated the progress of getting to our goal and now we have a nice stream of passive income.
These money fountains are already doing lots of the hard work for us and drenching us with happiness. It’s like having a 3rd person working and giving us their entire paychecks, which we continue to invest since we are still working.
Our portfolio is comprised of mutual funds and ETFs. We own shares of over 2,000 companies worldwide and don’t need to worry about tracking them separately, thanks to our passive investment strategy. After 10 years of investing, about 25% of our portfolio is made up of investment returns. That means that one quarter of our portfolio required very little effort from us to be produced. It’s like your boss paying you for four days of work, while requiring you to only work three. How do we do it? Easy, we just stay the course. Tranquilito, que todo viene a su tiempo. (keep calm, everything comes in its time)
We get income from our portfolio in two ways: through dividends and capital gains. The dividends from the retirement accounts get reinvested automatically and the ones from the non-retirement accounts get reinvested according to our asset allocation.
Last year, we did some tax loss harvesting and reported a total loss of $2,043, all while having a decent annual portfolio return of over 9%. With tax loss harvesting, we report losses on our portfolio, but we don’t really lose the money, as we invest it into a similar asset. It just can’t be invested into an identical vehicle, according to the IRS.
Our 2016 passive income streams and other unearned income sources
|Bank Sign-up Bonuses||$1,200||We opened a few bank accounts and got some nice bonuses.|
|Class Action Lawsuit Settlements||$692||These were surprise checks we got in the mail.|
|Credit Card Cash Back Rewards||$480||Mrs. Enchumbao manages the credit card rewards programs and got us some nice cash back.|
|Dividends||$18,130||Index fund investments|
|Ebates.com||$53||If you would like to save with Ebates, you can sign up using our link. This is an affiliate link, which means we receive a commission if you sign up using this link, and you get a kick back bonus too.|
|Gifts||$268||Cash-equivalent gifts. We include them because this money can be used any way we want.|
|Interest||$394||Interest from savings/CDs|
If we were to stop working today and just continue living as is and without moving from our apartment, just the passive income from the dividends and the rental property would cover all of our essential expenses including all food, housing and transportation costs. Plus, we could go further and take some capital gains from our index funds for discretionary spending.
The great news is that our lives after early retirement involve moving to an area with a lower cost of living, so we won’t need to sell many investments to compliment our passive income. Given the fact that we have 2-3 years to go before we hang up our boots, we might not even need to ever sell any investments to cover our expenses.
A closer look at our dividend income
Dividends are the stream of income that are growing the most while we sleep. We increased it by 48% last year to $18,130. This number will be even higher once we retire, since we’re still in the accumulating stage.
The tricky part of our dividend income is that most of it comes from retirement accounts. Which means that we won’t be able to count on a big chunk of that money right away or, to be more precise, within the first five years of early retirement. As of today, we’re only getting about $2,000 in dividends in our non-retirement accounts that we can spend right away. The rest of the needed cash for the first five years will come from savings and capital gains from our brokerage accounts, where we’ll have enough in low-risk investments to cover our essential expenses.
How our passive income has grown
Our passive income increased by 34% last year, over the previous year. That’s a damn good raise. We now have an extra $32,659 working for us.
Now, let’s see the power of compound interest in action. How much would the passive income that we got last year be worth in the future?
I use a compound interest calculator app to get quick calculations, but it only calculates in multiples of $5,000. So, let’s say that instead of $32,659, we add $30,000 to our investments from the passive income this year and spend the rest on a huge flat screen TV (yeah, whatever). If you calculate a 7% return on this money for 10 years, you’d have $60,290.
If you run the same calculation for a 30-year period, you’d have $243,495, unaccounted for inflation. That’s the power of compounding working in your favor, not in your debtors’!
Less effort required equals more time for us!
We get more excited about income coming from our investments than from our job wages for one simple reason: this doesn’t require too much effort on our part. There are no performance reviews to deal with and we’re not at the mercy of management to determine raises and bonuses. The investments are working for us!
Little by little our soldiers are replacing our effort, so that we can prepare our exit strategy to be able to spend time as we wish. We gladly provide the seed money to corporations though index fund investments to go produce something and, in return, reward ourselves with investment gains. The key is to work once for your money and then let the money work for you, over and over again. Do the work once and keep getting paid forever. It’s a beautiful thing. Don’t you think?