Major Milestone: $12,000 Forward Passive Income
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I’ve tracked how much forward passive income I earn from investments since I started investing in dividend stocks. I prefer this metric over performance against the market indexes because I’m not trying to beat the market with these funds.
Dividend income is reliable and predictable. Based on the holdings in a dividend stock portfolio, you can project what your dividend income will be twelve months out. I use this method to estimate forward dividend income.
We cannot, unfortunately, predict the performance of the overall stock market in the year ahead.
Predictability of dividends and other income streams is one reason I invest after-tax money into income-producing assets. I make these investments after maxing out tax-advantaged accounts such as traditional IRAs, employer-sponsored retirement savings, and college 529 plans.
Most of my pre-tax investments go into index funds.
When I started tracking forward 12-month investment income (F12MII, aka forward passive income) on RBD back in November 2013, I was expecting to earn $3,681.15 in the following 12-month period or an average of $306.76 per month.
My F12MII has grown since then, in part riding the wave of a healthy economy and an epic bull market run. But also by adhering to the Triforce of Wealth and investing excess cash flow into income-producing investments.
Growth can seem slow or stagnant month-to-month. But over time, significant progress is inevitable if you invest with a long-term mindset.
Major Milestone: $12,000 Forward Passive Income
This month, my F12MII reached $12,640.52. That’s $1,053.38 per month!
This level has been a distant goal since I started tracking this stuff.
If I stop working today and do absolutely nothing to earn a living, I’ll still earn more than $1,000 every month.
That’s before taxes since this income is generated in taxable accounts. However, the majority of this income is taxed at a lower rate than my salary income. This is income generated outside of my retirement accounts.
Here’s a chart of my F12MII progress since I started RBD:
My records go back a decade further. I still maintain data back to October 2003. It was a year after returning from traveling, a few months into my new career, and less than a year after being broke and living with my parents.
I was 28 years old when I started. I’m 44 now. Here’s the chart back to 2003:
In October 2003, my F12MII was $119.36, or $9.95 per month. The long flat stretch between 2006 and 2012 is a visual of how badly the condo purchase hindered my progress.
Brick by brick, I built this portfolio of income-producing assets. There were no shortcuts.
I’ve always thought of $12,000 as the most significant milestone because it’s when I can reinvest a full $1,000 per month. $1,000 invested into a 3% yielding stock generates an additional $30 per year. With fresh capital still being added, the compounding interest is set to accelerate.
The recent sale of my long-time condo rental property catapulted my F12MII over the top, skipping right past the $10,0000 annual level.
As I’ve written many times over the years, my condo was a lousy investment property. Sure, it cash flowed. But I flooded it with money in the early years to get out of the hole I dug for myself. The purchase was poorly timed.
During the first two years of ownership, I paid off $43,500 of debt on the second mortgage I used to buy it and avoid private mortgage insurance (PMI). The 80-15-5 loan was a common financing strategy back in the day, which probably helped contribute to the bubble.
Then I refinanced twice, throwing more money at the loan principal to lower my monthly payment.
I haven’t seen those dollars in more than a decade.
All that cash was tied up as equity for the past decade, a necessity to make it a viable investment property.
Using a standard rental property cash flow analysis, I accounted for all expenses (including maintenance, vacancy, mortgage interest, etc.) after receiving the rent and before realizing any profit (what I counted as F12MII).
As of April, I was only earning about $70 per month in positive cash flow, or $840 per year. But I had more than $100,000 of equity in the property. That’s a terrible return on investment.
Taxes and HOA fees kept eating into my margins, and I was unable to raise rent over the past eight years. Perpetual rising costs were a primary factor in selling the property.
Now that we’ve sold, the proceeds are in a high yield savings account earning interest.
I’ve always counted interest on cash as an income stream, even when I had very little in savings earning a measly interest rate. Small amounts of income are better than no income. Beginners should not be discouraged just because there’s not much coming in.
Every penny counts.
I used the example above to keep it simple. The proceeds from this sale were closer to $150,000, and I’m currently getting 2.25% on my saving account. That’s what spiked the numbers. The high interest rate I’m earning on the cash minus the former rental income, plus recent dividend increases take me up above the $12,000 threshold.
Here’s a new look at the income received vs. projected chart that I’ve been sharing for the past few years. Next month, expect to see the red bar to become a more significant contributor.
What Should I do With all the Cash?
Now that the banana stand is empty and sold, what am I to do with all this cash?
I’m in the process of moving the cash between accounts. Once everything settles, I’ll put some of the savings into a one-year CD that’s currently paying 2.7% and will bump the F12MII a bit more.
You might be thinking it’s irresponsible to hold all that cash in a savings account and that I should put that money to work right away.
Well, honestly, I’m not eager to do much with the cash for now. I’m quite happy putting it into savings and earning a decent return on the cash.
I’ll set aside a chunk for taxes next year. There wasn’t a ton of appreciation realized upon the sale, but I will have to deal with depreciation recapture at tax time in 2020. I’ve spoken to a local CPA, and I’m expecting the tax bill to come in around $15,000-$20,000. Not fun, but not horrifying either. The cash is handy.
The rest will be set aside for a few small house projects, our next car (needed within five years), a legitimate emergency fund, and a generous freedom buffer to cover any unexpected expenses in our future.
Most of all, cash in the bank will give us financial security and freedom in our lives.
Once the transfers have settled and I’ve segmented the money in a spreadsheet, I’ll fully fund Mrs. RBD’s IRA for 2019 and may make some addition 529 contributions.
With whatever is leftover, I’ll start making monthly investments into dividend stocks and real estate crowdfunding platforms such as Fundrise and Realty Mogul.
I’ll continue a monthly $500 deposit into my M1 Finance pies, then probably add another $1,500 into my newly-transferred taxable account with Fidelity. Some of that will come from the savings stash and some from excess cash flow from my active income sources (salary, side business).
Combined with reinvesting current dividend income, new capital invested should be at least $2,500 per month going into stocks and real estate. I’ll aim to buy investments that yield higher than the 2.25% I earn in my savings account.
This significant cash position does make us more susceptible to interest rates. The Federal Reserve is now hinting they are considering lowering rates back down. If that happens, the savings interest rate will fall in tandem, damaging F12MII, but it’s not a deterrent from keeping it there in the short-term while I decide how to proceed.
I decided to stop the quarterly investment income reporting from now on in favor of keeping an up to date portfolio page that includes the details of our retirement portfolio allocations.
But I’ve been working toward this goal for almost sixteen years, so I’m excited to share the milestone with you. More importantly, I hope this achievement and the long road I took to get here is a motivator for investors getting started or at any stage of their savings progress. It takes time, but this stuff does work.
The next $1,000 in monthly income should come more quickly thanks to compounding interest and my career earnings doing well. At some point in the next ten years, I’ll have enough and will stop obsessing so much about money.
Do you track forward passive income? Where are you today? If you’ve reach $12,000, did you see an acceleration after passing that level?
Photo by Nicolas Tissot via Unsplash
Craig is a former IT professional who left his 20-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more HERE.
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Congrats RBD! $12K per year is my goal for my 401-Ken coupled with my SS at 67 would put me close to 50K per year. Sadly I’m 12 yrs older so a bit behind, but on track if all goes well.
Hey Ken… thanks. You’re still well ahead of most people your age!
12K$ of dividend income is awesome.
For your house a different way to get access to all that equity in there is to remortgage it to get the money out. I do that with my properties and its great. It only works though if you can stay cash positive after increasing your mortgage size which it sounds like you couldn’t do…so yeah definitely sell that.
I’ve had a bad rental and it sucks. Cutting the cord feels good though 🙂
Nicely done RBD! $12k in passive income is pretty awesome! We haven’t considered rental properties because of the crazy real estate market in Vancouver. Figured that we’d utilize REITs instead. 🙂
Real estate is getting frothier in DC. I don’t expect I’ll look for an opportunity unless the market tumbles. I’m comfortable with divis and crowdfunding.
As a retired CPA – I suggest making an appointment NOW and getting the computed tax gain completed. My reason is your CPA has more patient time now contrast to February – April he/she “may” charge you less for doing the work now instead of during tax season. Plus you know and have all the final closing figures at your disposal.
Waiting causes you to forget the paperwork and the amounts and so have to “rework” the same number twice.
January – April you just drop off/ email the normal mundane other reoccurring income and expenses to complete your/wife 1040.
This Assumes you personally have time NOW.
Based on your advice last post, I did reach out to a local CPA. She explained a few things, then said “I love new clients, but I have enough tax returns to do. So if you normally do your own, I can do the sale portion for you this summer so you’ll have it for tax time.” I ran some numbers that I had and came up with the ballpark range, but will put aside more than that so I have plenty to pay next year. I’ll probably have it done in July.
I see you tried. CPA’s are sadly are all TOO busy. Yes for sure in July reach out to some tax accountant who is NOT too busy and has years of experience – does not have to be a CPA.
The key is to get the transaction behind you so you do not forget the RE transaction dollars. Bring to the accountant two prior year returns + closing selling papers. (I assume the prior year returns or your internal workpaper has cost and accumulated deprecation since date of purchase). Good luck – dealing with gov. you need it.
Gogogogogogogogo! I’m at 103.31% of my annual budget in forward dividends, distributions, and interest. It is a good feeling and lets me sleep at night when the market is correcting.
Gratz bro dawg!
With no rental and all the cash in the bank, I am sleeping better than usual!
Thinking back to that era, progress was also hindered by saving for a house. We put nearly everything we earned into savings for about 18 months, right around 2010-2012. So that held us back some too.
It’s almost like I was pulling back the catapult for the past 12 years. Much of the equity was saved from 2006-2010. I’ve finally reaped the benefits of all that saving.
Hell yes. Nice job on the big $12k milestone and allocating the lump sum according to your plans. You are going to definitely spring that forward income right up!
Also, I have a few CD’s maturing coming up and may hold them tight in my high yield account that has 2.50% APY, to see what to do going forward. There are a few opportunities for 10 months – 12 month CDs between 2.70 and 2.85%, not sure how long I want funds held up, you know? How much do you plan on locking up in that 2.70% one year?
Nice work, great job and keep contributing that capital!
Not sure how much I’m going to put in yet. Probably about 60% of it. Rate is now lowered to 2.6% at my bank, so not as enticing.
Oh wow, that’s a beautiful graph. The spike at the end is awesome. I can’t wait to see the same thing with our portfolio. Our condo is up for sale now, but it’s very slow going. Market is not good here. 🙁
Well done! Having $1k per month is huge! That’s a big milestone indeed, congratulations!
Putting money in the CD totally makes sense. I usually always plan that if you want to use that money for something in the next 1-2 years, don’t put it into the market. Use a CD or high interest savings account until you’re ready. Smart play.