In this investing series, I’m going to be transparent and use our own money as an example. We’re not giving financial advice. We’re just guinea pigs so you can see what we’re doing, start to finish.
If I sound like a total noob, it’s because I am. It seems that FIRE bloggers either get it and their blog posts are mostly ticker symbols or they’re investing in real estate…and we’re neither. 🙂
When we set our FIRE date, May 18, 2019, we were only vaguely aware of how we planned to fund financial independence/early retirement. We kicked around the idea of investing in real estate for passive income a whole bunch of times, even buying a manufactured home park.
As I mentioned in our money management post, we’re out of debt and we don’t want to go back into debt for the purposes of investing. We don’t have enough cash to buy real estate outright and we don’t want to take money out of our retirement accounts either.
Well, we’re 550 days away, so it’s time to get serious and figure out how we’re going to generate passive income and real estate isn’t for us. We need another source of passive income, enough to cover our expenses (about $25,000/year today).
When it comes to funding financial independence, we want the laziest method possible. We want the laziest source of passive income, even if it means sacrifices ROI.
So we started looking into this. What exactly is passive income and what are some potential sources of passive income?
I think of passive income as some kind of system we set up to generate money that requires a lot of work to set up and then NO work to manage. Once that flywheel gets going, it keeps going…that’s passive income.
We just want to keep our money and have it grow. We’re OK with moderate risk and lower ROI because liquidity and passive income are the priorities. Something in between a checking account and a retirement account is what we’re looking for.
A taxable brokerage account is what we’re looking for.
I stumbled across this term many times…emphasis on stumble. Here’s the best kindergarten definition I can come up with for a brokerage account: it’s a piggy bank that has the potential for growth (and we get taxed when we take money out of the piggy bank).
From what I understand, a brokerage account is an account that we can use to put cash in and buy investments. We can even buy index funds if we wanted.
A brokerage account is easy to liquidate. If we needed the money, we simply sell the investments and close the account.
While the money is in this account, it has the potential to grow, unlike our checking account. Ideally, the money grows at a better rate than our online savings account. 😉
I don’t think a brokerage account is any safer…I’m not so naive as to think it’s some magical pot of gold at the end of the rainbow, but it appears to be the best way for us to address our FIRE priorities is to buy dividend-paying investments in a taxable account.
Here’s the current system we have for managing our money…
Check out those graphic design skills!
- We pay ourselves first by maxing our retirement accounts.
- Then, we top up our checking and statement savings (i.e. our “escrow account” for taxes).
- Next, we top up our high-interest savings account (i.e. our emergency fund).
- We haven’t opened a taxable account yet, so no money here (yet).
Here’s the system we’ll have for managing our money after FIRE when we cut off most (or all?) sources of active income…
Clearly, I do not have a degree in graphic design, but you get the idea.
- We’ll continue to fund our retirement accounts.
- We’ll put our dividend payouts in our checking so we can pay our bills and whatnot.
- We’ll top up our emergency fund as need.
All we have to do now that we’re debt free and maxing out our retirement accounts is to fill up the taxable account bucket so that we have enough dividends to cover our expenses. Fill the taxable account bucket and buy dividend-paying investments. Sounds straightforward to me.
By the end of this series, our goal is to make a decision about when we start investing to achieve our FI goal.