Author Topic: New to MMM and seeking advice on building passive income.  (Read 5973 times)

beastykato

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New to MMM and seeking advice on building passive income.
« on: December 25, 2014, 04:00:31 AM »
Just wanted to say hi since this is my first post on here.  I'm sitting here waiting for Santa to get here while the girlfriend and child are asleep and figured I'd finally register on here and get advice for what I'm trying to accomplish.  Obviously, my ultimate goal is early retirement, but I'd be happy right now with just building up extra income to supplement work.

So, a basic rundown of my situation:

Age: 27
Income: $60,000/yr (Typically 70k+ after overtime)
Biweekly after tax:  ~$1550-2200 depending on overtime worked
401k balance: $32,500 (Various low expense ratio funds)
Roth IRA balance: $13,000 (Vanguard Total Stock Market Admiral Funds)
30 Yr Mortgage: $140,000 @ 3.25%  ($~870/month)
Car: 2012 Honda Accord (Paid Off)
Credit Cards: ~$4000 @ 0% (Emergency repair to sewage line and fence for yard)
Savings Acct : $1750 @ 0.75% (Currently saving $500/pay and plan to pay off the credit card once $4k is reached)

Future expenses: New roof and windows (est. ~$6000-8000)


I'm seeking investing advice and passive income generating advice. 

It seems the most popular passive income is real estate. I don't know if I can or should look at getting a rental property considering all the responsibility with making repairs/collecting rent/etc. at this stage of my life.  I do not have free time to work on my house half the time let alone another home.

I am hoping to start making my passive income through investments.  What is the best method for me to do this?  Are there specific funds that I should be looking at for instance?

Everything I read online says to max out 401k and then Roth and then save.  Well, I'd like to know what kind of income these people have because on 70k I do not see any feasible way I can do that.  And saving money in my retirement accounts does not help me retire early or generate any income that helps me NOW.

My current (uneducated) plan is to invest in my 401k up to employer match, max roth ira (since I can still retrieve this money if needed), and save/invest the rest in savings, CD's, dividend ETF's, etc.

Is this my best route to achieve my goal?  Any and all advice is appreciated




ltt

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Re: New to MMM and seeking advice on building passive income.
« Reply #1 on: December 25, 2014, 06:05:05 AM »
I will be interested in hearing the answers to this also.

I agree with you that real estate investing takes time and, if you don't have the time to do the work upfront, take time to chase down rent money, deal with problem tenants, it can be more trouble than it's worth.  We have friends who, at one point, owned several rental properties.  The stories that they told me---oh my.  They put in massive amounts of time, after tenants would simply up and leave, trying to get the place ready for another tenant.  I'd never do real estate, unless you had a lot of time.

I also agree with you about putting money into a 401K that you cannot draw down until retirement age doesn't help you fulfill the passive income that you desire now.

The best option for us has been dividend income/capital gains made through investing in funds through companies like VanGuard, etc.  We reinvest the dividend income/cap gains.  You could start with an initial investment and build up over time.  I do believe a lot of Vanguard funds start at an initial $3,000 investment.

People will also talk about exchange-traded funds--I don't know enough about them.

If you are looking to invest and make any kind of decent return over the long haul, I would stay away from regular savings accounts, CDs.  They simply don't pay enough.

Your mortgage seems high--roughly 40-50% of your income.  Maybe the area of the country you live in??

Other than that, at your age, I think you are doing pretty good.


lizzzi

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Re: New to MMM and seeking advice on building passive income.
« Reply #2 on: December 25, 2014, 07:28:50 AM »
Just off the top of my head, I think you need to save for a while after you pay off the credit card, to build up an emergency fund that you can access easily for when life happens. (Sewer repairs, etc.)  Then start cranking up a Vanguard portfolio of low-cost index funds. Research the Boglehead approach…for a quick overview, just go to Wikipedia. I do a lazy-person portfolio…80% in VTSAX and 20% in VBTLX.  You didn't say whether you've been following this site for very long or not, but I'd advise going back and reading MMMs old blogs…some will be more valuable than others…and also keep an eye on posts and links from people on this forum, because you won't find better advice or better links to good advice anywhere else, IMHO.

Spork

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Re: New to MMM and seeking advice on building passive income.
« Reply #3 on: December 25, 2014, 08:01:24 AM »

Everything I read online says to max out 401k and then Roth and then save.  Well, I'd like to know what kind of income these people have because on 70k I do not see any feasible way I can do that.  And saving money in my retirement accounts does not help me retire early or generate any income that helps me NOW.


This was basically my track.  In retrospect, with a little more information now, I think I was probably wrong.  I'm near enough to retirement that at this point it doesn't matter though.

The advantage of the traditional 401k is it reduces your income for taxes.  So ... you squirrel everything you can there and pay less taxes.  Then, on retirement, you start the conversion process to move it to a Roth.  At that point, you will be making less income, so your taxes will be low and if you plan the taxes right, you'll pay minimum amounts on that conversion.  After funds have been in the Roth 5 years, they are "clean"... and you can use them for retirement.

Yes, you'll need some amount outside of the 401k to bridge that gap.  But you don't have to wait until 65 to get to it unpenalized.

wtjbatman

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Re: New to MMM and seeking advice on building passive income.
« Reply #4 on: December 25, 2014, 09:20:01 AM »
It seems like you have two issues here. One is saving enough (higher income and/or spending less), the other is how to utilize that increased savings and turn it into "income".

The reason you can't max your 401k plus contribute to a Roth IRA on 60k-70k income is because your expenses are too high. We are paying off debt right now, but once that's paid off will be able to max 401k + max two Traditional IRAs on 65k a year. We do live in a low COL area, but we also aren't very mustachian about everything. For instance we spend $130 a month for cable internet and TV. We go to the local VFW once a week or once every two weeks, and we don't exactly limit ourselves to $1 beers when we are there. Definitely have fat to cut :)

When it comes to passive income, there are a couple ways you can look at it. You can turn your investments into honest-to-god income producing assets. Rentals, which you aren't high on, or even something like dividend growth stocks (google "Dividend Mantra" for a great blog on dividend growth investing), which allows you to invest while also earning higher than normal (compared to index funds) dividends which creates a solid and growing income stream. For good dividend ETF's, look at Vanguard's High Dividend Fund (VYM) and Dividend Growth Fund (VIG). The other, much more common method, is as simple as saving enough along the way, and eventually starting to sell off assets to pay your expenses. That's the 4% safe withdrawal rate you've probably heard about by now.

I honestly like your plan, aside from the CD's/Savings Accounts part of it. Only contribute to those savings vehicles for short term goals (saving for house down payment, saving up for a car, whatever). Investing in CD's will not help you build much of a passive income stream.

Chrissy

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Re: New to MMM and seeking advice on building passive income.
« Reply #5 on: December 25, 2014, 11:20:34 AM »

Everything I read online says to max out 401k and then Roth and then save.  Well, I'd like to know what kind of income these people have because on 70k I do not see any feasible way I can do that.  And saving money in my retirement accounts does not help me retire early or generate any income that helps me NOW.

My current (uneducated) plan is to invest in my 401k up to employer match, max roth ira (since I can still retrieve this money if needed), and save/invest the rest in savings, CD's, dividend ETF's, etc.

Is this my best route to achieve my goal?  Any and all advice is appreciated

Yes, this is the best way to reach your goal.

Maxing out the 401k has something to do with income, but also something to do with expenses.  Why don't you post a case study on Ask a Mustachian, and see what advice you get for cutting expenses?

beastykato

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Re: New to MMM and seeking advice on building passive income.
« Reply #6 on: December 25, 2014, 04:50:02 PM »
Thanks for all the advice.  I look into posting a study on there and provide my expenses here just for comparison.  I have been randomly reading articles on here for a couple months, but I'm not completely familiar with everything that is available on here.

In response to some of the questions asked:

My mortgage is ~28.1% of my total income via my calculations (Minimum after-tax income of $3100/month divided by $870/month).  Is that considered too high?  I thought I was about average on that and I really only jumped on my home because of the interest rates and I thought I'd be a fool to not purchase a home while rates were 3.25%.  In addition, I didn't put any money down on the home because I went through the USDA and I had just started working at the time.  So, I could possibly refinance at some point because ~$50/month is PMI, which increases my 3.25% apr but I'm not sure how to calculate that.  I assume I'm closer to 4% with the PMI.

My expenses are as follows:

Mortgage: $870/month
Food: $500/month
Natural Gas: Varies ($32 in summer/$80-120 in winter)
Electric: Varies (seems to average about $65-70)
Gasoline: $220  (My commute is 30mi one way so 4 tanks of gas in my beater, plus one tank in the Accord for weekends)
Cell Phone: $45/month
Internet: $62/month
Netflix: $12/month (Cut the cord so no cable, but very resourceful on getting stuff online plus have a server in the home for movies, etc.)
Car Insurance: $92/month (I pay one yearly payment of $1104 for 2 cars Corolla beater for work and my Honda)

Total: ~$1970/month
Free Income: $1130/month (assume no overtime and this is with 5% 401k coming out)
Roth IRA max: -$460/month (This puts me down to $670/month)

At this point I'm at about $600-700 per month which isn't that much money over 4 weeks.  I use that for things like clothes and general wants.  I will never get rid of this because life just isn't worth living if I can't take my family to dinner and buy some things that we enjoy.

With my overtime factored in, I think I can save $1000/month by working at least two 12 hour shifts per week.  If I work more this can increase, but I don't know if I can sustain that type of work schedule.  I am setting a goal to make $80k this year though.  My girlfriend works, but I don't count her income because it's part-time retail and changes with the seasons.  Her money I usually put aside to take us on a couple vacations a year.  Then she spends the rest on her food/gas/running my son around/etc.  I'm sure she sneaks some hair salon days in there lol ;).

I don't really see where I can cut my expenses much more:

I can get a car that's better on gas, but that adds a whole new plethora of areas to get raped (trading in the current vehicles, new finance charges, etc.)  So, I'll just stick with my two cars until they crap out on me.

Cell phone is already on straight talk pre-paid.  Without making some major sacrifices in my ability to get service I can't get this below $45 and retain data access.

Already cut the cable cord.

Car insurance and internet are a necessity.  And internet is what allowed us to cut out the cable bill.

Food... That's all I can really see improving on.  I saw the a recent MMM article on this.  I need to switch from meat to beans apparently =P. 


Chrissy

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Re: New to MMM and seeking advice on building passive income.
« Reply #7 on: December 25, 2014, 06:17:31 PM »
Call the internet company and see if you can get them to lower the cost.

Insulation on windows, door draft insulation, etc. for your winter gas bill.

Do you have any equity in your home?  PMI is usually removed once you hit 20%.  I'd pay into it until you hit that number.  Hopefully, no refinance is necessary.

Instead of cutting discretionary funds entirely, can you trim by 10% and see if you feel pinched?  If not, trim by another 10%, and so on?

It seems like there would be a tax advantage to getting married, given that your girlfriend (whom I assume is also the mother of your child) makes far less than do you.  Hopefully, someone with experience will post about this.

I suggest you discuss your finances with your girlfriend, and see if she can assist by maximizing her income.  Surely, she could contribute $300-$400/mo toward the household, which is only 20% of the expenses.  Or maybe she'd be interested in putting that amount away for retirement in her own tax-advantaged accounts, thereby increasing your joint net-worth.   

beastykato

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Re: New to MMM and seeking advice on building passive income.
« Reply #8 on: December 25, 2014, 10:45:04 PM »
My mortgage requires that I pay 0.004% PMI yearly for the life of the mortgage.  I don't know what I my total balance is at this moment, but at the beginning $140,000 * .004 = $560/year.   That $560/year divided by 12 amounts to $46.67/month and then reduces as my principal balance is reduced.

My girlfriend is the mother of my child.  I dunno about marriage, that would involve expensive rings and receptions (my family would require this).  I assume it would amount to far more than any tax savings we would achieve. 

As for her income.  She is applying for full-time work now and hopefully can find something decent in our depressed area.  Right now though her income in very sporadic so trying to include it in a spreadsheet is more trouble than it's worth.  She has her own vehicle, car insurance, and normal daily expenses.  She often relieves me of the cost of groceries so I tend to just leave it at that as far as my calculations go.  I'd rather prepare to not have her income in place in my calculations and have "bonus" money available rather than plan for it and her not receive any hours that month.
« Last Edit: December 25, 2014, 10:49:41 PM by beastykato »

FarmerPete

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Re: New to MMM and seeking advice on building passive income.
« Reply #9 on: December 26, 2014, 10:23:15 AM »
My expenses are as follows:

Mortgage: $870/month
Food: $500/month
Natural Gas: Varies ($32 in summer/$80-120 in winter)
Electric: Varies (seems to average about $65-70)
Gasoline: $220  (My commute is 30mi one way so 4 tanks of gas in my beater, plus one tank in the Accord for weekends)
Cell Phone: $45/month
Internet: $62/month
Netflix: $12/month (Cut the cord so no cable, but very resourceful on getting stuff online plus have a server in the home for movies, etc.)
Car Insurance: $92/month (I pay one yearly payment of $1104 for 2 cars Corolla beater for work and my Honda)

Total: ~$1970/month
Free Income: $1130/month (assume no overtime and this is with 5% 401k coming out)
Roth IRA max: -$460/month (This puts me down to $670/month)

At this point I'm at about $600-700 per month which isn't that much money over 4 weeks.  I use that for things like clothes and general wants.  I will never get rid of this because life just isn't worth living if I can't take my family to dinner and buy some things that we enjoy.

Not to get all Matrix on you, but you have two choices here.  You can take the red pill, keep things more or less as they are and squirel away a little money every month.  You'll live a decent life, have enough to cover some expenses, use credit cards for the big ones, and then pay them off...pretty much what it looks like you're doing now.  Or you can take the blue pill and transform your life to meet your goals.  Here are some great ideas on how to cut your expenses.  I'm not going to sugar-coat it, you won't like these.  I see a few glaring problems. 

First, unless your GF is using one, why do you have TWO CARS!?@#!?  Pick one and dump the other.  There is no reason to own two cars for one person.  If your GF is using the Accord during the week, this is less of an issue. 

Second, your commute.  Using the IRS reimbursement rate ($0.56 per mile), you're spending 31x2x0.56=$34 every day to get to work.  That's $694.40 per month (20 days).  That's a crazy high number!!!!  Yeah, you're only paying $220 of that on gas, but obviously you're causing a lot of W&T and using up your car every day/week/month.  Not to mention your time.  To fix this, either move, carpool, or find public transportation. 

Third, I promise you that you can find something better than Straight Talk.  Which cell network are you using via Straight Talk?  You might not be able to save a ton, but there are good alternatives with AT&T and Verizon.  ST is one of the worst companies I've ever had to deal with.  I'd lose money to not have to deal with them.

Fourth, food.  You're spending is high.  You need to cut that down.  Even shaving $100 is a good option.

Fifth, Internet.  $62 is way high.  Call up the local company and threaten to cancel.  They'll give you a discount to keep you.  You should be able to get this down to $40 or less.  I pay $41 with Comcast to get 25mbps and HBO/HBOGo.

-------------


Here is the bigger problem I'm seeing though, and it's not what you wrote down, it's what you didn't write down.  You have no entry for property taxes or house insurance.  Without looking at a mortgage calculator, I know those arent' escrowed in to that number you listed.  I'd wager that those would add 2-3k a year in expenses that you aren't listing.  There goes most of your savings right there.  You've got zero listed for medical expenses.  Even copays cost something.  You've got no listing for water/sewer.  Do you have a well?  No listing for gifts/Christmas.  Nothing for car maintenance.    Driving 15k a year commuting, I'm sure you're going through breaks/tires/oil at a rate that you need to budget for it.  These are not emergency fund things, you should be saving for it.  Here is my recommendation.  Track your spending.  Start using Mint, YNAB, Excel, or something else to really get a handle on what you and your GF are spending money on.  If you guys are living as a couple, you should be earning, saving, and spending as a couple.  Cut your expenses down and start to really save.  It will change your life.

Income is not your problem.  Based on what you didn't track, I would question how accurate your numbers for what you did track really are.  Did you look at historical data?  Do you breakdown and categorize your spending regularly?
« Last Edit: December 26, 2014, 11:46:38 AM by FarmerPete »

beastykato

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Re: New to MMM and seeking advice on building passive income.
« Reply #10 on: December 26, 2014, 12:01:22 PM »
You're right I did forget a few things like the water bill.  I was just typing off the top of my head there so I'm sure there are few more I forgot as well... yep garbage disposal (coming to me as I type this.)

Cell phone. I left verizon and at&t for straight talk.  They both charged me far more for what I get than straight talk does.  Straight talk in my area runs off the At&t towers so I get very good service and don't have to worry about data.  I am looking into switching to Republic Wireless which I read about yesterday here on MMM.  So, that may come in the near future and would put me at $40 for the same thing I have now for $45.  I could drop to 3g service there for $25, which is what I think I'll probably do.  Verizon Pre-paid is $45 per month as well, but it only gives you 500mb of data or 1gb if you choose autopay.

Cars... We actually have 3.  I have a 2002 Toyota Corolla with 190k that is my beater for work since I drive so many miles.  My girlfriend has her own vehicle and then I have my new car (I know I know this was before my MMM days) I did purchase it for a "low" price though, haggled very well and paid it off quickly.  So, at this point all 3 cars are paid off and in the clear.  I don't see a reason to not just run the Toyota until it's wheels fall off. 

As for my commute, I won't find any work in my area (aside from professional careers) that pays what I am making right now.  Everyone where I live (SW PA) either works in the coal mines or natural gas.  I'm making more than a majority of engineers I know in my area with a job that requires a HS diploma.  That said I could move closer to work, but I don't see the advantage at all.  I recently read the article about commuting on here and I simply don't agree with it.  If I moved to the city I work in I would pay double for a house my size and end up in the same boat with a shorter drive.  Then there are the non-money related issues of more pollution (air, noise, congestion), living in a busy city, worse schools.  Simply put....I'll stay where I am and keep driving to work.  Now I have started car pooling to save on gas and am also probably going to switch to a 3 day work week when I get the chance.

Food...you're absolutely right there I spend too much. 

Internet I have two options in my area Verizon and the cable company.  DSL blows chunks and the cable company owns me.  I pay $62 for 30mb.  The $45 dollar plan drops you all the way down to 8megs and simply isn't fast enough for our use.  This may be me justifying my bill, but $62 and being able to stream all my movies and download video saves me from having to pay a $80 directv or cable bill.  As for threatening to cancel Verizon and my cable provider (Atlanticbb) would both tell me to pound salt if I threatened to cancel.  I've tried they don't care.  When I used to have DirecTV that tactic worked very well and they would lower my bill considerably.  These companies have a lock on this area and they know it.

Mortgage  My escrow does cover my insurance, PMI, taxes and principal payment.

Principal & Interest: $616.39
Property Tax: $169.91
Homeowners: $36.75
PMI: $45.82
Total: $868.67

Medical and Prescriptions

I don't pay for prescriptions I receive them all free through my employer and I pay $200 max in copays/year and then everything is covered. I have very good insurance.
« Last Edit: December 26, 2014, 12:18:43 PM by beastykato »

rmendpara

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Re: New to MMM and seeking advice on building passive income.
« Reply #11 on: December 26, 2014, 02:31:03 PM »
Just wanted to say hi since this is my first post on here.  I'm sitting here waiting for Santa to get here while the girlfriend and child are asleep and figured I'd finally register on here and get advice for what I'm trying to accomplish.  Obviously, my ultimate goal is early retirement, but I'd be happy right now with just building up extra income to supplement work.

So, a basic rundown of my situation:

Age: 27
Income: $60,000/yr (Typically 70k+ after overtime)
Biweekly after tax:  ~$1550-2200 depending on overtime worked
401k balance: $32,500 (Various low expense ratio funds)
Roth IRA balance: $13,000 (Vanguard Total Stock Market Admiral Funds)
30 Yr Mortgage: $140,000 @ 3.25%  ($~870/month)
Car: 2012 Honda Accord (Paid Off)
Credit Cards: ~$4000 @ 0% (Emergency repair to sewage line and fence for yard)
Savings Acct : $1750 @ 0.75% (Currently saving $500/pay and plan to pay off the credit card once $4k is reached)

Future expenses: New roof and windows (est. ~$6000-8000)


I'm seeking investing advice and passive income generating advice. 

It seems the most popular passive income is real estate. I don't know if I can or should look at getting a rental property considering all the responsibility with making repairs/collecting rent/etc. at this stage of my life.  I do not have free time to work on my house half the time let alone another home.

I am hoping to start making my passive income through investments.  What is the best method for me to do this?  Are there specific funds that I should be looking at for instance?

Everything I read online says to max out 401k and then Roth and then save.  Well, I'd like to know what kind of income these people have because on 70k I do not see any feasible way I can do that.  And saving money in my retirement accounts does not help me retire early or generate any income that helps me NOW.

My current (uneducated) plan is to invest in my 401k up to employer match, max roth ira (since I can still retrieve this money if needed), and save/invest the rest in savings, CD's, dividend ETF's, etc.

Is this my best route to achieve my goal?  Any and all advice is appreciated

Real estate is great, however, it is not risk free and can end very badly if you do not do extensive homework and manage it well.

Early in your career and life, it's probably better to keep most of your investments in securities (not real assets) like stocks, bonds, etc, and focus on building your career. For everyone without an endowment, the vast majority of the first 20 years of their working adult life earnings will come from employment rather than investments.

As you build your portfolio over the years, real estate becomes increasingly attractive given the ability to leverage your returns.

The passive income will come naturally as you build your wealth. Don't worry so much about diversifying today as you will earn a greater return on your time by investing in your skills, experience, etc, that will contribute to greater earning potential.

Personally, I'm just a bit younger than you, and that's been my focus so far. I bought a condo a few years ago which is a rental today, but my intent at the time was to live in it (which I did for 2 years) but then had to move for a job. I stumbled into a rental property by accident, and would rather not have the hassles of the property today if I could choose again. I really did get lucky by purchasing a foreclosed condo in 2012 which has gone up over 50%, but I don't expect more than 2-3% annual appreciation going forward.

Anyway, I'm starting to ramble, so I'll just say that if a too good to pass up deal comes up in real estate, then take it, but a property is better as a way to hedge against rising rents (i.e. you live in it) than as an investment. Most of the returns in real estate come from leverage rather than equity. Nothing wrong with the leverage so long as you can afford to take on that risk, but I would argue there are better ways to invest at this point in your life than a rental property.