I am quite sure that almost all of us at some point in time have Googled “How to earn money without a job?”. No doubt, there are countless articles on how you can earn money sitting at home and this is possible also but this does not mean you don’t have to work. So, it’s either your self-employed income or additional income. Checked chatGPT and it comes with 8 options of earning money without a full time job but with a subtle warning note in the end – “This income might not be sustainable”. What is required instead is to make your money work for you every day, including weekends and holidays. Earn, save, invest, repeat!
In this blog we are going to show that how with right planning, focus and consistency, you can grow returns from your investment in the form of passive income and move closer to your goal of financial independence. We can show you because we did it ourselves. Along with the obvious absolute increase (more savings buy more assets get more returns), we will also be looking at how to maximise returns from current portfolio (for example – through redistribution of funds from lower return assets to higher return assets).
While calculating our FI number, we primarily focused on the wealth aspect of achieving Financial Independence. In summary, we calculated our potential annual expenses during retirement years and multiplied it by x factor, considering other things like inflation, rate of savings etc. So the focus was to accumulate enough wealth that will sustain us for x number of years given our age, lifestyle, health factors etc.
However, in last few years we consciously started planning for extreme level of FI, where we will have enough passive income to pay for our living expenses during retirement. Obvious question is – why? Are we being over cautious?
- Cash flow – not withdrawing from asset base
- Maximise asset returns
- Create multiple streams
What do we consider as Passive Income?
We go by traditional definition of passive income where we get monthly or periodic returns from our assets in the form of rental, dividend and interest. For the purpose of this blog, we did not consider any income we generate through this blog or paid coaching work as part of our passive income. This is new income stream and hence not right to include in comparison with existing income sources. We also do not include any cashbacks, CC rewards, loyalty points etc we receive throughout the year for two reasons – 1. They are not regular and difficult to estimate and 2. Not always possible to convert in cash.
Our last 4 years Passive Income history – in numbers
Assuming our passive income was 1000$ in 2020, here is the distribution across different categories and progress over the years:
| 2020 | 2021 | 2022 | 2023 | |
| Rentals | 64% | 60% | 39% | 40% |
| Dividend | 28% | 38% | 50% | 31% |
| Interest | 8% | 3% | 11% | 28% |
| Total | 1000 | 1137 | 1459 | 2130 |
Some points to note:
- While the rental contribution dropped (From 64% to 40%), the rental income actually increased in absolute terms.
- Rental dropped in 2022 as we went through a period of renovation in one of the properties (which resulted in more rental this year)
- Dividends went up more than 50% (in 2021) due to active investment in Dividend ETFs (US and SG)
- Next increase in dividends (50% in 2022) was due to increased investment in ETFs such as USOI/QYLD/RYLD
- Most significant change was in our Interest income from our India and US investments. Part of this is attributable to high interest rates in 2023 that we are taking advantage of and part is due to redistribution of equity investment (high risk, moderate returns) to private equity instrument (high risk, high returns)
110% increase in 3 years! How we did it?
Count every dollar
Most important and first step is to take stock of the situation – unless you know how your investments are generating income, you will not be able to make significant changes. Even we did not track our passive income before 2020 – we knew we had assets in terms of real estate, stocks and bank deposits but we did not analyse how they are performing in terms of monthly and annual returns. Some tips:
- Make sure you consider net returns i.e. deduct all expenses that you have to incur from the gross amount. For rentals – it could be utilities/tax/maintenance etc that you have to pay.
- Make sure you consider all kinds of passive income – both in terms of sources and in terms of amount. Don’t worry if it is just one source right now – put it down – believe me, this is first step to convert it into multiple sources of income. Also consider both current and future income for the year. For example – you may be holding some stocks that pay quarterly dividend. Since you don’t get that amount monthly, it is easy to miss this in your tracking.
- Sometimes there are grey areas – whether you should consider a particular component as passive income or not. It is up to you what you define but the key is to be consistent over the years. For example – some people consider loyalty points (airline miles, restaurant vouchers etc) as this is something which they can spend over and above their regular income or assets.
- Update your tracker regularly – could be done weekly, monthly or quarterly depending upon the amount of returns and frequency. This will also give you an insight into where you are and can help identify what you should or should not do. Also, some returns are across years – for example interest on fixed deposits (FDs) done in 2023 would result in income for 2024. So be careful where you count it – make sure you don’t count it twice.
What started as one-off exercise in 2020 is now an annual exercise to estimate our passive income from different sources and updating on monthly-basis to make sure we are on target. Looking at our 2020 income and keeping in mind the target for financial independence, we realised we need to double our passive income. We gave ourselves 4 years to do that which means that by end of 2024, we should have enough passive income to pay for our living expenses during retirement.
Make every dollar count
Now comes the interesting part – Don’t let your money just work for you … make it work hard. Make it work at night..make it work on weekends, holidays, during lean periods, vacation…basically 24×7, 365 days!
Typically we do this in last quarter of current year – plan for next year investments which will generate passive income for that year and in future. During the year, we mostly track the progress unless there is some interesting opportunity that we should consider. Like last year, we moved some of our 2nd year cash bucket (please check our blog on cash-bucket strategy) to US Fixed deposits for 1 year (as interest rates were quite high).
- Quite clearly, our passive income in 2020 was skewed towards rentals. So this was a no brainer – make new investments in dividend paying stocks/ETFs and/or check interest options. Since the interest rates were quite low (except India – but we did not want to take currency risk), we focused completely on dividend stocks. Along with new investment, this also meant selling some non-dividend or low-dividend stocks from our portfolio and buying high-dividend stocks. We chose to do both index ETFs (low risk, low return) and covered-call ETFs (high risk, high returns). This gave us 14% net increase in our passive income.
- In 2021, we bought more of covered call ETFs (specifically USOI, QYLD, RYLD) which really accelerated our dividend income for 2022. However, in order to diversify (both in terms of currency and country), we did private equity investment in India. With India’s private start-up scene hotting up, we evaluated it as a moderate risk, high return strategy. In order to avoid FX loss, we decided to use this money for our India expenses (when it is paid back). While this strategy increased our returns in 2022 but actual impact was more in 2023 (due to forward loading of expenses in such instruments).
- This one completely falls in the category of “Make every dollar count”. We renovated one of our properties to make it more functional and higher return asset. Though this means our net rental returns for 2022 took a hit, we are confident that this would lead to at least 7-8% increase in rental for coming years
- With tech stocks making a comeback in early 2023, we sold a part of our tech portfolio and invested in a property in Bangkok (<our experience of buying property in BKK>). This started generating rental returns in March 2023. Also, we could maximise our net returns as it was already rented out so we did not have to pay agent commission and condo maintenance fees.
By going through above changes, we have been able to not only double our passive income in 3 years’ time but also our income portfolio looks more balanced now. We will continue with re-distribution of our portfolio (moving some of our high risk tech stocks to moderate risk, moderate returns strategy) to compensate for one-off income in 2023 (like US FDs)
Reap the Benefits of Compounding
Making small changes with combined long term effect
Did some investments where dividend is reinvested
improved net returns – sometimes we cannot increase rental but can we reduce our expenses? [reduce fees, avoid double conversion]Tactical investments – In order to take advantage of high interest rates, we also did some “opportunistic” investments in late 2022, where we moved our 2nd year cash bucket to US FDs for 1 year (can renew in 2023 if interest rate is still high). This way we will be able to earn guaranteed compounded returns without risking our cash-flow for coming years
