Getting Ahead With Passive Income

by James & Miel on June 19, 2008 · 0 comments

Hi All,

Since we officially broke through the $400,000 mark on our net worth on Tuesday, some critical reflection of how we’ve been make it this far seems in order.

A consistently big part of our wealth has been in stocks, and you’ll see that when we take a monthly look at our net worth, we often comment that shares are doing well or a particular stock has helped to propel our net worth. So, here is the breakdown.

We have approximately $265,000 in stock and stock mutual funds. This about 65% of our net worth. The other 35% is real estate equity or miscellaneous stuff like savings bonds or personal valuables. Of this $265,000, about $104,000 is in income producing stocks – that’s 26% of our total wealth. (clicky for the numbers). In particular, the income stocks seem to be playing an important role.

While there are some trade offs, we’ve been getting a pretty good amount of cash from our income stock investments. Most of our income stocks yield at least 9% in dividends, so we’ve focused heavily in the energy sector in order to find the kind of companies with that high of a payout. So, this strategy means we’re less diverse. But, in sacrificing diversification we’ve gained extra income. Check out the chart below to see exactly how much and where it comes from.


The income has given us at least two advantages.

First, the extra cash has an accelerating effect on our efforts to achieve important financial goals. For example, we are in the final stages of paying off our second mortgage – in less than 11 months we managed to dump over $21,000 worth of expensive debt. Without the additional $850 a month, it would have taken months longer to achieve this goal.

Second, the extra income means we’re more efficient in our wealth building. For example we’re planning on saving $5,000 in an an emergency fund. This could be more like $8,000, but we know that our stocks will be paying out every couple of weeks, so we aren’t tied down into needing a big emergency fund – if anything goes wrong we’ve got cash to cover it. This means that we allocate more money toward economically productive activity. Right, so instead of keeping a big emergency fund in a low yielding money market account, we can put more of it into productive investments like real estate or high quality stocks.

So, the main takeaway here is that having a comfortable source of passive income can really supercharge your wealth. A good way to do this is via high yielding stocks.

Best,

James



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