If you ever want to be absolutely free, you need to develop multiple income streams so that when the inevitable change happens, you’ll be covered. I first recommend you start with the end in mind. What makes you happy? From this question, now you can derive how much money you honestly think will make you happy.
Once you’ve digged deep to answer these two important questions, you can then start building your income goals.
What makes me happy?
Family, friends, experiences, travel, freedom to say and do what I want, sports, relationships, the online community, hot tubbing with drinks, food and enough money to not have to worry. Good old nostalgia really makes me happy too.
What makes me unhappy?
Racists, bigots, haters, lying politicians, bad bosses, cronyism, inequality, people who say one thing and do another, thieves, and zealots who impose their will on others.
How much money do I need to achieve what makes me happy?
Anywhere from $3,000 to $15,000 a month after taxes to account for a single life to one that provides for a family of four.
I really don’t need much to be happy if I’m supporting only myself and have no debt. I was super happy living on nothing while in school, so $3,000 a month after tax would be fine.
$15,000 a month after tax is a large nut that equates to about $235,000 in gross income a year, the income level where I think maximum happiness is attained. With $15,000 a month, I can afford private school tuition for two if necessary, go travel 8 weeks a year, get huge and eat whatever I want, have a paid off car, live in a comfortable home practically anywhere in the world, and continuously save for a rainy day. Furthermore, $15,000 a month after tax can be used to help my parents in case they need financial help for whatever reason.
Think about an after tax monthly income number you’d like to achieve and let me know. For now, it’s time to open up the kimono and see what can be produced after over a decade of saving and investing. This is a long post, so make sure you go to the bathroom first!
CONSTRUCTING THE FINANCIAL FREEDOM PORTFOLIO
The first step is to save aggressively. I’ve been saving 50%-75% of my after tax income every year for the past 13 years. I try not to be a miser and have done my best to try and spend money on things I enjoy e.g. vacations, food, a home, and tennis. Where I did “sacrifice” was not buying higher-end new cars (all but one were second hand and under $20K) and going on less exotic vacations. Amanpulo I’m coming for you eventually!
I’ve predominantly invested all the savings in long-term CDs that have returned 5.5% all the way down to 2.5%. Currently, my risk-free return is averaging about 3.75-4% a year. These aren’t sexy returns by any means, but I sleep very well at night and have also never lost money in this portion of my wealth for the past 13 years. A smaller portion of my savings goes towards my trading account.
CD Interest Income: ~$2,800/month. My CD interest income can almost fulfill my lower end of my target income range if I were a single guy. This is income that will keep coming automatically for another 5-6 years and I don’t have to do anything except renew come expiration. I’m not worried about interest rates getting crushed during a reset, because if they do, that simply means there is little inflation. The best thing right now is that my primary mortgage at 2.625% costs less than my risk free CD return of 3.75%! Thank you for now, BenGenie. Whenever a CD interest yields more than the 10-year treasury and has a shorter duration I am an aggressive buyer.
Online Interest Income: I’ve currently got about $50,000 in a high yielding online interest income account at ~1%. Although that’s only $500 a year in interest, that’s still 100X better than the national 0.1% average money markets now provide. It’s easy to withdraw and deposit money in an online savings account nowadays. Don’t let your liquid cash sit in a bank that pays you nothing!
Dividend Income: ~$1,200/month. I have not focused on dividend income because: 1) the underlying values of these stocks have fluctuated so much over the past 5 years, and 2) I never withdraw any of the proceeds as I don’t need the income right now. I’ve focused more on capital preservation and growth instead. Companies have been cutting their dividends aggressively since 2008 to preserve cash. Only now in 2012 are we seeing signs of companies raising their dividends eg Wal-Mart and American Express. To be clear, my dividend income all comes from active investments. None of my dividend income comes from my 401K because they can’t be touched until 59.5.
Rental Property Income: ~$1,500-$3,500/month after expenses. The range in income property has to do with a vacation rental which swings huge during the summer and winter months, and fades during the months of May, October, and November. I’m basically averaging about $2,500/month per year total. The income is very reliable, since everything is well maintained. One of my rentals was bought 10 years ago, and the rent is over 4X the mortgage interest now. The mortgage can be paid off, but the rate is only 3.125%, and the interest is an expense deduction so I’d rather have the liquidity. Once the rental property mortgages get paid off, then rental income will increase further. Thanks to amortization and operating expenses, the taxes I have to pay on my rental income is next to nothing. I plan to start paying taxes on my rental income after I retire and get into a lower income tax bracket.
P2P Lending: I’m now investing in peer to peer lending with Prosper.com as of 11/2012. They advertise returns of roughly 9.5% if you have diversified your loan portfolio with at least 50 notes. As my CD interest income declines as they come due in 2014-2015, I plan to invest more and more of my 4% yielding CDs in Prosper.com. My goal is to create an additional $500-$1,000 in income through social lending. If you would like to join me on building wealth as an investor through peer to peer lending you can sign up here with Prosper.
VARIOUS PASSIVE INCOMES REVIEW
I’m currently at about $6,500 gross a month in relatively passive income that is now being generated. The blue sky column is achievable if it’s a bull market and all my rental property mortgages are paid off in about 5 years. After 30% tax, my base case passive income is around $4,550 a month. The irony is, if I didn’t work for a living, my after tax income would probably be over $5,000 a month due to a lower effective tax rate of 20%!
Another solution is to just move to one of the seven no income tax states upon retirement. Base after tax income will therefore rise to about $5,500/month and $8,800/month for blue sky. California’s 10% income tax is a killer! $4,550 is not bad, but still far short of my goal of generating up to $15,000 a month in after tax income.
At the rate I’m going, I’ll have to probably work another 10 years, so screw that! Instead, I’ve been cultivating other income streams that will allow me to work 2-4 hours a day on my own terms.
SAVINGS AS A BUFFER TO PASSIVE INCOME
I’ve saved up about 17 years (16-18) of living expenses if I retire tomorrow and keep my living expenses the same. The 17 years of savings excludes the use of all passive income. In other words, I could just live off my passive income and never touch my savings if I really started being more frugal.
I’m sure I could cut expenses such as my credit card bill, and sell my primary residence and downsize to make my savings last forever. However, that’s too disruptive and decreases the quality of my life, which is the wrong direction. The plan is to stay conservative, not touch savings, and build passive income to survive.
Remember, the thesis of “How To Retire Early And Never Have To Work Again” is that all one has to do is save 55%+ of their after tax income for 18 years from ages 22-40, and s/he will have 20 years of living expenses covered to not have to work until government assistance kicks in. This is a very conservative assumption since most people will work from ages 40-60 after retirement, and will have various side income streams. Plenty of folks will also find a partner to pitch in and share the expenses.
I’m not including my 401K savings/investments as part of passive income. I treat all government tax deferred programs as write-offs since the Evil Empire can easily take all our money away to fund their egregious spending. The 401K and IRA, if you are so fortunate to not get discriminated by the government to contribute, should be a buffer against your savings. Max out your 401K and shoot to save at least 20% of your after tax income a month. Here’s how much I believe everyone should have in their 401Ks at different ages.
ACTIVE INCOME STREAMS AS A BUFFER TO SAVINGS
Tennis Teacher: I can teach tennis for about $40/hour. In fact, I’ve often toyed with starting my own tennis instruction website and supplement my passive income with 80 hours of teaching a month ($3,200). I’ve also fantasized about being a tennis instructor at the Four Seasons Resort in Bora Bora. Teaching tennis on occasion is nice spending money, but something I do more to have fun, exercise, and meet cool people. Tennis lessons at private clubs are around $80-100 an hour, so in a way, I feel like I’m doing a public service.
Trading Portfolio: I have a trading portfolio which I like to play around with on Etrade to keep me engaged with the markets. Investing is in my blood, and I’ve been doing so for the past 15 years when Ameritrade and Charles Schwab first went online. There were some major successes and epic failures in the beginning. Nowadays, I’m more conservative, but I can still easily lose money as I can make money. The reason why I don’t talk about specific stocks and strategies is because I don’t want you crazy kids to follow everything I do and sue me for giving you bad stock advice. Instead, I highlight my market predictions and give you some overarching thoughts as to why I am buying and selling the markets.
Online: Online income has come out of left field and is now my second largest income source. In three not-so-short years, I’m amazed to discover the internet is allowing so many people to work for themselves and live location-independent lifestyles. Online income is by far the most fun and the most efficient of all incomes given the low overhead costs. I’ve always written just for the fun of it as hopefully long-time followers have noticed. I suck at writing affiliate posts, and I will try to get better, but they bum me out so maybe I’ll hire someone! I just want to write about fun and topical stuff which we can all discuss. With around 150,000 pageviews a month now, you can see how it’s relatively easy to make $1,000 a month in ad revenue. A banner that pays $6.75 per 1,000 impressions = $1,000 a month with 150,000 a month in pageviews. I have yet to find a client that pays $6.75 per 1,000 impressions, but you get the idea. If I ever start blogging about blogging, then I’ll let you know this income stream in more detail. The online income goes to charity, loved ones, operating costs, or never gets spent. When I need it, I’ll use it, but not now. It’s the same way with CD, dividend, and rental income – they are all never touched.
Personal Consulting: I’ve launched Financial Samurai Online Services. The main service is offering personal finance consulting, career advice, severance negotiation, and resume analysis. After writing over 900 personal finance articles, and reaching financial independence myself, I believe there is demand for financial consultation.
Financial Tech Consulting: In January, 2014, I began consulting for a digital wealth management firm called Personal Capital based here in San Francisco and Redwood City. I love how they are disrupting the traditional wealth management industry with their free, DIY financial dashboard where everybody can management their net worth, track their expenses, and examine their investment portfolios for excessive fees. I highly recommend everybody sign up for their free software to manage their wealth. I’ve been helping build their content and brand online 25 hours a week. It’s been a blast learning about the Silicon Valley world. They just raised $50 million in series D round funding in October, 2014 and I’m bullish about their future for the next 5+ years.
BONUS INCOME STREAMS AS A BUFFER TO ACTIVE INCOME
Rich Hot Spouse: One of the secrets to early retirement is having a working spouse. The secret to a happier early retirement is to therefore find a hot and rich spouse! You can do jack doo doo and claim to the world how you retired early, so long as your spouse continues to work and provides you with goodies and healthcare. It’s no joke that many people make it a mission to look for a wealthy spouse. See: Should I Get An MBA To Find A Wealthy Spouse?
Private Equity: I’ve currently got one private company investment totaling close to six figures. I’ve written it off to zero because so rarely do these private equity companies exit for a nice profit. However, the company has been around for 6 years and survived the financial crisis. Hence, perhaps there is a chance I will not only get my money back, but also get a solid internal rate of return down the road.
Private Real Estate: During the financial vomiting period of 2008-2009, I invested $50,000 into a distressed global real estate fund which was buying property at 15-30 cents on the dollar. The fund was a private offering to a certain group of accredited investors. The fund is up about 120% in three years and spits out a reasonable 4-7% dividend yield. Once the fund is liquidated in several years, I calculate a roughly 25% IRR. Looking back, of course I wish I had invested more. It’s just hard to drop dimes when things are blowing up left and right.
The Federal Reserve: Unfortunately for savers and those who seek yield (me), interest rates will be low for a very long time. I’m thinking for the rest of our lives actually. That said, if the economy really starts growing gangbusters again, the Fed could start raising interest rates, causing a commensurate jump in US treasury yields, which will lead to higher savings interest, CD interest, and dividend yield payout ratios. Everything is relative though, which means prices for goods and services will have also gone up despite an increase in interest/dividend income. The flip side is, asset owners benefit greatly as well.
Primary House Rental: I’ve been wondering whether I should sell my house or rent out my house due to the social media craze which has formed in the SF Bay Area. If I decide to rent out my house and downgrade to a normal 2/2 apartment, I would probably generate an additional $3,000-$4,000 in monthly income after paying rent for my new place. Rents have gone bonkers, especially for single family homes in good areas in San Francisco. The problem is, I love the house and the location. Life is about living in the moment, and I don’t want to live in a crappy rental just to save or make more money. The latest as of 7/16/2014 is that I rented out my primary residence of 10 years for $8,700 a month and bought another house.
Book income: Since retirement, I’ve written a 100-page book called How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye. The book helps employees profitably quit their jobs by providing a framework to negotiate a healthy severance package. I managed to negotiate roughly six years worth of living expenses after engineering my layoff in 2012. Never quit, always get laid off!
TOTAL COMBINED INCOME STREAMS
With multiple income streams you not only develop financial independence, you also achieve as well! You don’t have to worry about pissing anybody off anymore, or feeling guilty about doing things for money you otherwise wouldn’t do.You’ve gone from being someone who is second guessing everything, to someone who does what feels right. Nobody can ever take away your passive income you’ve spent years building.
EXPERIENCING THE FREEDOM AND ERADICATING FEAR
With multiple income streams you not only develop financial independence, you also achieve mental independence as well! You don’t have to worry about pissing anybody off anymore, or feeling guilty about doing things for money you otherwise wouldn’t do.You’ve gone from being someone who is second guessing everything, to someone who does what feels right. Nobody can ever take away your passive income you’ve spent years building.
It takes a damn long time to build a livable passive income stream nowadays thanks to Ben Bernanke’s monetary benevolence. As a result, CD interest income is not good enough and my focus will be more towards online income, rental properties and creating a larger dividend portfolio. That said, I think there’s a mini-bubble in dividend investing, so I’m not jumping head first just yet.
I haven’t been paying too much attention to my passive income breakdown until now because my work income has always been my primary focus and only about 25-45% of that income after tax is what I need to live. However, if I truly plan to pursue the life I *think* will make me even happier, then its time to buckle down and develop more side income since my day job income will disappear. $5,000-$8,000 a month in after tax passive income is good, but it’s still $7,000-$10,000 away from what I find ideal.
GET GOING AND NO CO-MINGLING OF INCOMES!
It’s important to not co-mingle your funds if you want to build significant multiple income streams. With passive income, you’ve got to pretend you’ve got no other income. That way, you stay focused and don’t start getting lazy with your mission to achieve freedom. If you make $100,000 a year at your day job, pretend you make ZERO so that you give everything you’ve got to find other income sources.
If you make $2,000 a month from your online properties, ignore it completely in order to really develop your day job income, rental income, dividend income, interest income and so forth. Compartmentalize! You must compare apples to apples eg not passive income to online income. Everyday I wake up, I pretend I have next to nothing in my bank accounts, trading accounts, 401K, and Paypal. As a result, I’m super motivated and find the journey incredibly rewarding and fun.
I recommend all of you to start saving aggressively, build a CD ladder, invest in rental properties, look into dividend yielding stocks, work harder at your jobs, leverage your skills to teach others, and start a small business. You’ve got to do your due diligence and pounce on investments you like with focus. Build buffer after buffer of income streams.
I can promise you that if you do all these things, in 10-15 years, you’ll be set for life. And if you can’t figure it out and need guidance, let me know!
Recommendations For Achieving Financial Freedom:
Manage Your Finances In One Place: The best thing you can do to achieve financial freedom is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going. The best feature is the 401K Fee Analyzer which has allowed me to save over $1,700 in annual portfolio fees I had no idea I was paying. There is no better free platform on the market that has helped me more than Personal Capital. It takes less than a minute to sign up.
Check Your Credit Score: Everybody needs to check their credit score at least once a year given the risk of identity theft as well as the importance of having a good credit score when borrowing money, apply for a mortgage, and applying for a job. 30% of all credit reports are wrong! For over a year, I thought I had a 790ish credit score until my mortgage refinance bank on day 80 told me they could not proceed due to a $8 late payment by my tenants from two years ago! Thanks to the late payment, my credit score was hit by 110 points to 680 and I could not get the lowest rate! Check your credit score for free here at GoFreeCredit.com and protect yourself. A credit score is important for potential job opportunities and getting the best rates on mortgage loans, car loans, and credit card loans. The industry average credit score for rejected mortgage applicants is 729! Where do you stand?
Fully updated as of 11/23/2014