Last week I announced my new goal focused on reaching financial freedom on a basic level by the end of 2013. In that post I did give some definitions and clarification of what I mean with that goal. However, I did not quantify it enough just yet … at this point I have no clue yet, what the exact amount of passive or portfolio income I need to reach that basic financial freedom. And that’s essential information to create a strategy to accomplish that goal.
So let’s get to work, let’s first take a look at …
Expenses are the red side of the balance, the side where your money is leaking away. These expenses aren’t necessarily bad, and a lot of them can’t be eliminated. Remember that I defined my goal on a basic level, referring to all expenses related to our home. There are three types of expenses:
- Expenses that can be eliminated
- Expenses that cannot be eliminated, but can be influenced
- Expenses that cannot be eliminated or influenced
In my case expenses that can be eliminated are for instance the mortgage payments … but I’d need quite a large sum of money to do so. So eliminating them is not really realistic. Other expenses are simply essential, like the charges for drinking water, or the energy bill. They cannot be eliminated, but I can influence them … a little anyway. And then there are some other expenses that cannot be influenced or eliminated, like house-related taxes. These are simply a fact of life for home-owners.
In numbers per month:
Yikes! That’s a lot of money! Now let’s see what my status is with respect to …
Passive and Portfolio Income
Let’s first take a look again at what we mean by Passive and Portfolio income:
The Passive Income stream is income that’s derived from work that you did once, but that continues to create an income stream. It may need some maintenance to keep on generating that income, but it’s mostly a big investment once and some small maintenance jobs down the line.
Portfolio Income is income that comes from property that generates money. Examples are interest payments on savings accounts or bonds, dividends on stocks, rental income from real estate and so on. The grit of this one is that you own something, and that generates money.
So there are two categories that have a different dynamic, but a similar result.
In my situation I have some sources of passive and portfolio income totalling about € 80 per month. It comes from the following sources:
- Advertising revenue from blogs (about €35 / month)
At the moment this is only from Adsense ads on this site.
- E-book sales (about $19 / month)
Sales of my ebook Personal Core Values are highly irregular and have a low frequency, but on average they bring in about $19 per month (that is … one book per month )
- Affiliate income (recurring: $3 / month)
This is also quite irregular, and I don’t have a good overview of affiliate income to be honest. I know that I have a recurring affiliate income from Dreamhost and E-junkie, that comes down to about $3 per month now.
- Income from TheorieTV
Well, actually this is non-existent yet. TheorieTV is an e-learning site for people learning for their theoretical test for their drivers license in the Netherlands. The site brings in revenue, but at the moment we are reinvesting everything to improve the product and sales. Further down the line however, I expect that we will be able to create an income source from this activity. I say we, because it’s an activity that we developed as a family, my brothers, sister and parents were and are all (heavily) involved in this product.
- Interest and dividends
There’s only one source of portfolio income right now, and it’s not that much. Currently at about €1 per day, but that’s going to disappear. This income was mainly interest we receive on a savings account. But that account will soon be empty, because we have our bathroom, toilet and plumbing renovated next month.
So that comes down to a total of about €80 per month. As you can see I have income sources in Euro and US Dollar. Since I live in the Netherlands, and all my expenses are in Euro, I will make my calculations in Euro. I will define the exchange rate at the end of every month. For now I use an exchange rate for EUR/USD of 1.45. There’s a lot of turmoil on the currency markets, so it’s hard to say where the rates will be from month to month. It’s a fact I have to live with.
There’s a basic overview of Expenses and Income now, but then there’s also the influence of …
This is a tricky one, and I’ve decided to ignore it for now. I’ll explain why.
In the Netherlands we can deduct interest payments for the mortgage on your first home from our income tax. This means that somewhere between 42% and 52% of the interest payments will flow back as income. As you can see in the table 52% is the top percentage of tax we pay in the Netherlands.
But besides being able to deduct the mortgage interest, I also have to add the Passive and Portfolio income to my taxable income. They fall into different “boxes”. And as such have different percentages of tax that needs to be deducted. Portfolio income in itself is not taxed for instance, but the average value of assets is taxed at 1.2% per year (if your assets rise above a certain level … which they don’t in my case).
Anyway, I decided to ignore the tax effect for now. On one side I ignore the tax deduction (which would lower my expenses), and on the other side I ignore the tax effect on my income (which would lower my income). I haven’t calculated it, but I think it pretty much evens out.
Okay, so now the expenses and income is clear, and the effect of income tax is ignored. This sums up to:
That means that I start with an awesome 5.6% of basic financial freedom. There’s quite a long way to go, but like I stated in my goal I want to reach that 100% by the end of 2013. That’s 28 months from now.
Plug the leaks
The first step I’m going to take is to see if I can reduce the level of expenses first. Cutting expenses is only going to bring me a little probably, because the vast majority of expenses are of the type that cannot be realistically eliminated. But there may be room to improve a little.
Passive or Portfolio?
After that, the inevitable main phase of this project is to get more passive and/or portfolio income. For me the main thing is to get passive income sources, because of two reasons:
Most of my expenses are on a monthly basis, so I need the cashflow to follow a similar pattern. Portfolio income has a tendency to create cashflow only once or twice a year, because it relies on interest and dividends. Rental income from properties does provide a cashflow … but you need quite some capital to get a property first. Not a viable option right now.
- Capital requirements
I already mentioned this briefly under cashflow. Portfolio income requires a lot of capital. If you take my gap of € 1,346 per month for instance. If my portfolio would provide a steady 9% income (an optimistic figure), the total capital invested needs to be about € 180,000! Where on earth am I going to find money like that in 28 months?! (I’m open to suggestions )
So Portfolio Income is nice, and I will look into it for the expenses that have a yearly cashflow requirement (like insurance), but it’s not the main element of my strategy.
Generating more passive income
It’s about creating recurring low maintenance income – it’s not entirely passive of course. As you saw in the list earlier, I already have some passive income sources, but not nearly enough for my goal. The main thing now is to dedicate time to activities that have a potential for generating passive income.
I have taken that step already, not only mentally, but also in my schedule. I cut back on the dayjob for one day per week, I now work as a teacher in higher education 3 days a week. One day a week is to take care of the kids (I have two), and the other day is dedicated to creating passive income. Besides that one day a week, I also had an average of 10 hours per week dedicated to freelance work (evenings and weekends). Still a lot of things on the schedule and a full week of work, but the time to work on passive income is there.
The next thing to do is to really dig into the different options I have. That’s something I’m going to do in another post (or else I’d probably make this post twice as long, and it already is a long one!).
I’m excited about this! The next post will be about plugging the leak in the expenses. I already took some steps (talk to the bank, invest in some energy saving measures), the results aren’t in yet, but it looks like I can gain something there.
(Please note that some links in this post are affiliate links. If you use them, I might be 0.1% closer to my goal )