Financial Independence Progress Report for August 2017

August has come and gone and it is time to look at the numbers for August 2017.

Emergency Fund $60K 85.34% 87.32%
College Fund (80K) 56.83% 57.59%
Passive Income (2016 vs 2017) $391.93(08/2016) $535.78(08/2017)
Retirement Fund 76.87% 77.79%
Roof for our Family($750K) 00.00%
Medical Fund (via HSA) 4.14% 4.18%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • My passive Income for August 2017 is approximately 36% higher than August of 2016. Past investments in VCADX (CA MUNIs) and VWUIX (National MUNIs are the main reasons for the increase.
    • But, since I re-distributed the sale proceeds to other funds that follow the regular quarterly payout cycle, my total dividends for 2017 year-to-date is higher than that for 2016 at the same time. So. nothing to worry!
  • Additional Investments
    • Captured gains in taxable account and paid off car loan
      • Sold rest of Tax managed Balanced fund (VTMFX) to capture capital gains and add to my cash fund.
    • Paid off our car-loan
      • I did not find any deals worthy of investing among the mutual funds I own….out here in the US and outside. So, instead of keeping it in the bank and/or a money market fund, I repaid the remaining portion of our car loan! Now, every month, I will have some extra savings to be applied for home down payment and/or to replenish the emergency bucket.
    • Investments in tax-deferred account
      • Last month, I sold portions of some funds to capture accumulated capital gains and created a cash fund inside my IRA.
      • I deployed some of the cash in the cash fund to buy two international mutual funds…the US funds have not come down from their super expensive valuations.
        • VTIAX: Vanguard Total International Stock Fund
          • Lower expense ratio
          • Covers the entire international market (large, medium and small caps)
        • VIHAX: Vanguard International High Dividend Fund
          • Higher expense ration
          • Covers a portion of the international market only (mainly large caps)
      • The curious reader may ask: why not just invest everything in the cheaper VTIAX?
        • I am following my old rule of risk diversification….in the same class of mutual funds (international market), I always have two funds compete for your money.
      • So, both VTIAX and VIHAX will now compete with each other to make more money for me 🙂
  • Add to the cash fund..details 
    • I started a small cash fund accumulated a couple months back to take advantage of any market dip(s) in the US market. This month, I again captured some gains in a couple of my investments to add to this cash fund. 
    • Now, the waiting game begins for a significant stock dip. What is a big dip? I will wait to employ my cash fund at least until the NAV drops 10% on any of my passive income streams.

How much freedom did I buy today?

I was having a very tiring day today…a few tiring days actually and I was totally spent when I came home. I checked my blog emails and found some uplifting comments from readers of one of my blog posts. My spirits got recharged due to those comments. Thanks to Tristan (Dividends Down Under), Ambertreeleaves (ambertreeleaves) and Mister SLM. I decided to put my recharged spirits to good use and write a blog post that I have been thinking about sharing for quite a while. This is my way of paying my dues for the good karma that came my way today from the three wonderful people mentioned above.

Back in mid 2014, I defined what Financial Independence means to me in one of my very early blog posts (link). The plan definitely has changed a bit over the last two years. But, I have been executing this plan with all the motivation and money that I can muster

Along the way, I realized one profound motivational idea that I will share via this blog post. I have spreadsheets that track my monthly dividends going all the way back  a few years and in there, I track which of my monthly needs are funded fully by my current passive income.

One day, while updating that, I realized this profound motivational question. Every now and then, I have a rough day at work or at home and sometimes both 🙂 I keep myself motivated by asking myself this question: How much freedom did I buy today?

Here is my answer.

  • My Passive Income goal is
    • $4000 per month (Why $4000 pm?)
    • $48000 per year
    • $131.5 per day ($48K/365)
  • By end of this year, if all goes well, my monthly passive income will be $750 per month. This has come through a lot of sacrifices…both by me and my family.
  • How much freedom will $750 pm buy me?
    • $750/$131.5  =>  5.7 days per month => 136 hours per month => 4.38 hrs a day (31 day month)
  • To put this in perspective, here is the amount of freedom $750 pm of passive income will buy me:
    • 4.38 hours     of absolute freedom every day!
    • 5.7 days         of absolute freedom every month!
    • 68.4 days      of absolute freedom every year!
    • 2 months      of absolute freedom every year!

When I started working many many years ago, saving was defined as money that I did not spend. I was very aimless and had no idea of Financial Independence. Obviously, money vaporized like water. It took a nasty and depressing curve ball in life to start me on a search to something different and I ended up discovering Financial Independence by accident (my first blog post). Thanks to the wonderful world of FIRE bloggers, I found my “something different” i.e. Financial Independence and Early Retirement. Though, it is not going to be as early for me…but better late than never hey !!

The question that keeps me motivated and fills me with enormous drive is the question:

  • How much freedom did I buy today?
    • My answer is 4 hours a day. 
    • What is yours? 

Hope this question motivates you to keep striving for FIRE!

Welcome to new members of my mutual funds family :-)

This month (July 2016) ends the changes I have been making to my mutual fund family. This month, I am welcoming two new members to the family. Hearty welcome to VWELX (Vanguard Wellington Fund) and VWITX (Vanguard Intermediate Term Tax-exempt fund). The obvious next question is why 🙂

In October of 2014, I implemented my Passive Income Streams strategy. I wrote about it here. One of the six design principles was: For each risk bucket, have a minimum of two investment vehicles. I like this principle for two reasons:

  • Investment philosophy diversification
  • Investment manager diversification.

My thesis is that both of the above together will provide better risk diversification. Using this thesis, I build the following set of Passive Income streams (as of 10/18/2014).

Table 1: Investment Vehicles Update 10/18/2014
Risk Bucket Name Investment 1 Investment 2 Investment 3
Risk 1 (Cash) Smarty Pig (online) Credit Union N/A
Risk 2 (Bonds) VCAIX (CA munis) N/A N/A
Risk 3 (Balanced Funds) VTMFX (50% stocks and 50% National MUNIs) N/A N/A
Risk 4 (Dividend Investing) VDIGX (div growth) VHDYX (Curr div) N/A
Risk 5 (Capital Growth) VTCLX (large+mid cap) VTMSX (small cap) N/A
Risk 5 (International Funds) VTMGX (large blend) N/A N/A

Over the last couple months, the stock market has been on a tear. I cannot come up with any logical reason to explain why…it seems that no bad news can touch this market….it seems to go up and up and up. For day traders, this is heaven….but for normal folks like me, this seems suicidal…there is no reasonable value to any asset in my mutual fund family. Dollar Cost Averaging (DCA) is supposed to help me deal with this, but I can’t seem to pour money into vehicles which rise up like crazy. So, I have taken a few steps over the last couple months to do the following:

  • Bail out to re-enter at a later date
    • Sold VTCLX and VTMSX
    • Moved some of it to VWITX (National Munis) and some to cash
    • Cash helped me capture valuable stocks big time during the Brexit market dip.
  • Sell a portion of funds that had appreciated to capture gains
    • Sold portions of VTMFX, VDIGX and VHDYX
    • Captured gains accumulated over the last two years
  • Move some of the captured gains into to more solid ground
    • More on this below…..
  • Move the remaining captured gains into cash (Money market funds)
    • Basically fresh powder for the inevitable market downturn….

To redeploy the captured gains, I needed to find new vehicles that will produce passive income for me. I like all the categories I have listed in my original design in Table 1…so no new categories were needed. But some of the mutual funds did not have any competition 🙂 So, I decided to add some competition in two categories:

  • Bonds
  • Balanced Funds
  • Dividend Investing

The changes are listed in Green Color in Table 2 below.

Table 2: Investment Vehicles Update 07/30/2016
Risk Bucket Name Investment 1 Investment 2 Investment 3
Risk 1 (Cash) Smarty Pig (online) Credit Union N/A
Risk 2 (Bonds) VCAIX (CA munis) VWITX (National Munis) N/A
Risk 3 (Balanced Funds) VTMFX (50% stocks/50% National MUNIs) VWELX (60-70% stocks/30-40% bonds) N/A
Risk 4 (Dividend Investing) VDIGX (div growth) VHDYX (Curr div) VDAIX (div appreciation)
Risk 5 (Capital Growth) N/A N/A N/A
Risk 5 (International Funds) VTMGX (large blend) N/A N/A

Why did I choose those specific funds?

    • In the Bonds category, I had VCAIX (CA Muni bonds). Since this was CA specific only, I bought into VWITX (National Muni bonds). Now mu MUNI bonds are spread across many states in the country. The advantage is that National Munis add better risk diversification. The disadvantage is that I lose the state tax exclusion that VCAIX would have given me.
    • In the Balance funds category, I already had VTMFX…a fund split into 50% stocks (cap appreciation, low dividends) and 50% National Munis. I wanted to add a bit more aggressiveness into the balanced fund category and I chose VWELX, a fund with modest current income and long term growth. The fund invests across a broad section of the market and is known for stable returns….under performance in  bull markets and lower loss in bar markets but stable returns.
    • The disadvantage is that the turnover is 35% i.e. a bit tax unfriendly but short term capital gains are pretty low. So, I think it is worth it….lets see if my bet pays off in the long run.
    • In the dividend funds category, I already had two funds which I am very happy about. VDIGX is turned for future dividend growth (low current income) and VHDYX is tuned for high current income (low future dividend growth).
    • VDAIX on the other hand is a mix of both: companies that have consistently raised dividends for the last 10 years (good current income) and also the same companies have promise to continue growing the dividend stream in future.
    • One can ask….VDIGX is managed by Donald Kilbride, a super star manager who has consistently beaten VDAIX for the past few years. So, why not invest all the money in VDIGX if you do not need current income? Risk diversification and lower turnover.  Donald Kilbride is one person and VDAIX is an index…no more explaining needed 🙂
  • Money Market Fund
    • I want to start accumulating some cash to jump into the market when the markets go down “deep”. I have noticed that when DOW goes 100 pts in the morning, it is back up 200 points by end of market. Looks like a lot of people are investing on a 100 pt dip.
    • My new standard will be to accumulate cash until DOW dips 300 pts. My assumption is that the market will not be able to come back from a 300 pt loss in one day i.e. I can really get some value for money. Lets see how this goes.

Thatz it for now. Join me in welcoming the new members to my mutual fund family!!

Capital Gains Investing…a gut check

Kevin O’Leary…

In my on-going search for increasing my knowledge about all things finance, I recently came across Kevin O’Leary of the Shark Tank fame. More precisely, I came across a quote he made in this video. The statement he made was this: I would never buy a stock that doesn’t pay a dividend. Whatever you think of Kevin O’Leary as a person, it is worth thinking about the statement. This post is about my thinking process and what actions I took w.r.t. my portfolio.

My Capital Appreciation investment

When I started my journey towards Financial Independence in late 2014, I wrote about the design principles behind my Passive Income streams and how I implemented the design. One of the design principles is this: Invest some money in Capital Appreciation (high risk) buckets. I called this bucket the lottery ticket investments. The implementation of this bucket was done via two Vanguard Mutual Funds.

  1. Vanguard Tax Managed Capital Appreciation Fund (VTCLX)
  2. Vanguard Tax Managed Small Cap Fund (VTMSX)

If you look at the funds, they are excellent in many ways…

  • both Morning Star gold rated and tax efficient.
  • both minimize dividends and maximize capital gains…hence tax efficiency.
  • both have an awesome track record in prior years

But, for the past four months or so, these two funds stood out whenever I did a Cost Basis analysis in my account. Let us consider VTCLX for example. Since 2014 when I started funding my Passive Income Streams, I have accumulated appx $12,000 in my VTCLX account. If I do a Cost Basis analysis i.e. how much money I invested vs how much is the current market value, here are the nos:

  • Total Investment: $12, 000
  • Today’s Market Value: $12,300
    • All dividends, however small, have been re-invested
    • Includes all capital appreciation
  • Excludes any taxes I paid on the dividends

Damn….Kevin O’Leary time again….

Yes. Only $300 total return i.e. a 2.5% total return, even excluding taxes. Similar numbers for VTMSX. This is where Kevin O’Leary’s statement bugged me. In one of the few interviews I watched of him, he said something like: if I am giving my money to a company, I expect a decent return….a return comparable to the risk I took on.

Painful Questions…

So, I asked myself this question: for the risk of investing in funds whose Beta is > 1.0 i.e. funds that are more riskier that the market, I got a 2.5% total return. This is pathetically low in my opinion. But, lets argue that 2 years (2014 to 2016) is a very small investment window. Then comes the scarier question: what kind of return can I expect in the years going forward? Here is why I think this question is scary:

  • S&P 500 is at historically high P/E ratio (inflation adjusted p/e)
    •  I.e. room for capital appreciation is pretty low
  • Dow Jones Industrial Average is also at historically high P/E ratio (charts)
    • I.e. room for capital appreciation is pretty low
  • Nasdaq composite is also at historically high P/E ration (charts)
    • Higher than the 2000 dot-come bubble!
    • I.e. room for capital appreciation is pretty low

For a moderate risk taker like me, the data is showing me that there is not much room for capital appreciation. Note that Google stock went from $550 per stock to $750 per stock from 2014 to 2016, but also note that VTCLX has google stock 🙂 So, it must be that there were many stocks that dragged it down. But, I do not dabble in individual stocks…I prefer the risk diversification and passive nature of mutual funds.

It gets even worse. I plotted a graph of Vanguard Intermediate Term Tax Exempt MUNI fund (VWITX) and an investment here could have easily beat VTCLX over the last two years. So, if we assume that the room for capital appreciation is low, then it looks like I made a very inefficient investment by choosing capital appreciation vs cash flow. Now for the all important question: Why 🙂

Why why why…

I have realized that I missed a fundamental point in my analysis of investing for capital appreciation and passive income streams.

  • Achieving capital gains implicitly implies that one must identify an under-valued asset that can multiply its asset value over time.
    • For example, if I had bought Google stock in 2014 at $550 for one stock, I could sell it today at $750 per stock i.e. $200 worth of capital appreciation.
  • If every market index (S&P, DJIA, Nasdaq, etc) is at historically high P/E, there is not much room to find value in stocks
    • Vanguard folks are good but they are not magicians hey 🙂
  • If finding under-valued assets is the foundation of capital appreciation, then perhaps I should have invested in a product whose primary focus is Value investing.
    • For example, Vanguard Value Index Fund Investor Shares(VIVAX) is one such fund. But, between 2014 to 2016, the appreciation here too is minimal.
    • If experts who sole job is to find value have not been able to do it, then what hope is there for an amateur like me?

So, my fundamental premise for investing for capital appreciation in my taxable account passive income streams was a broken one.

  • Note that I am not saying that capital appreciation approach is broken. Maybe VTCLX has accumulated many under performing assets whose value will become apparent after a bust-boom cycle. Or maybe a balanced approach across capital appreciation and current income like in Vanguard Equity Income Fund (VEIPX) is the way to go, but this fund is not tax efficient for folks in the higher tax brackets.
  • So, for an investor like me who is in the search for tax-efficient income on the path to financial independence *at this point in my life*, investing in capital appreciation at current high market evaluations does not seem like a wise decision.
  • I have a lot of money riding on a total market strategy in my tax-advantaged accounts i.e. there is sufficient skin in the game riding on a capital appreciation strategy. But the time frame for my tax advantaged accounts is more than 20 years i.e. enough time for a boom+bust cycle. But, in my passive income stream bucket, my time frame is appx 10 years and I do not see a place for capital appreciation investing, at current market evaluations.
  • If markets take a deep and I see value in VTCLX or VTSMX, I will dive right in….lets see what the future holds.

Portfolio Changes

I cashed out VTCLX and VTSMX (teeny weeny gains) and moved the money across the following buckets

  • Vanguard Intermediate Term MUNI fund (VWITX)
  • Vanguard Dividend Appreciation fund (VDIGX)
    • Qualified dividends i.e. taxes capped at 15%
    • Dividend appreciation potential…a conservative investor’s substitute for capital appreciation 😉

How to prepare for the next recession?

For the past few months, I am seeing some excesses in the market that has brought back memories of past boom+bust cycles. For example,

  • A 2bed/2bath condo sold for a neat $1mil,
  • A 3bed/2bath townhome list for $850K and sell for $1.2mil…I am not joking about this 😐
  • I saw many people jumping in to buy $70K cars
  • I saw people bid more than $100K over the list price to buy a very old home
  • ……

The above observations remind me of previous boom cycles and I felt that it was time to revisit lessons learnt from past boom+bust cycles. Hence this post. Hope it is useful for you. If you have lessons of your own to share, please do so…it would be much appreciated.

Boom+Bust cycles

I have faced two official recessions OR you can say a few bubble-pops in the last two decades of my life.

  • Economy was doing comes the dot-com bubble pop in 2001
    • This was officially a recession
  • Economy was doing comes the market tank due to the Iraq war
    • This was officially not a recession, but job losses were the same…..
  • Economy was doing comes the real estate bubble pop in 2008
    • This was officially a recession

Before each recession, there is a period of bubble formation OR economic prosperity….pick your poison 🙂 One could go back in US economic history and one would find the same repeated pattern of BOOM and BUST cycles.

  • 2004 to 2007: Boom time; Bubble pop in 2008-2010
  • 1994 to 2000: Boom time; Bubble pop in 2001-2003
  • 1983 to 1991: Boom time; Bubble pop in 1992-1994
  • ……..

The current Boom cycle has been on from 2010 onwards…I.e. we are more than due for a Bust real soon…..can we benefit from this knowledge? If you are interested in how I plan to benefit, please read on.

What did I see or not see during these cycles?

  • For the 2001 bubble pop, I had no idea this was coming…I was a finance newbie and really did not even know what 401K meant. But, I did see a lot of job losses around me, close friends getting hurt bad and I myself barely scraping through..more luck than anything else….it was a very stressful time.
  • For the 2008 bubble pop, I could see it coming and did take some decisions like moving to a more stable job, creating an emergency fund, etc. But, I did not predict the severity of the recession….again, it was a lot of job losses around me and it was again a very stressful time. I was fighting so hard to retain my job and stay afloat that benefiting from it did not come to my mind.

But, since I was no longer a financial newbie, I was fortunate to be around people who, on hindsight, proved to be financial geniuses. I was not smart enough to financially benefit form the lessons at that time, but I plan to do so in the next recession. Here are some examples of a common patterns I saw during the boom+bust cycles.

  • A person I know dumped $150K into the stock market, in the worst of the 2008 bust cycle and by 2014, he had more than doubled…infact almost tripled his investment. At that time, I thought he had nerves of steel to do that but on hindsight, he was just making use of the recession. He has now officially retired and working part time just for the social connections.
  • A person I know, a financial newbie, bought a home in 2008, under pressure from family since a baby was on the way. She really hated the idea of buying and came up with all financial reasons not to…but, a relative who happened to be a real estate agent convinced her otherwise and  even dropped the commissions for the purchase. Her house is now $500K past the purchase price and she stopped working to spend time with the baby. She now looks like a financial genius and the relative loses no chance to rub it in.
  • A couple of people I know bought houses at the peak of the boom cycle in 2000, 2004 and 2007. They went through a lot of suffering with undervalued houses…especially with the threat of job losses hanging over their head. It took many many years to break even and some have not yet done it still.
  • Job loss means loss of two important things as well: Health insurance and Life insurance.
    • COBRA insurance premiums for a family of 4 can cost as much as $1900 per month
    • No job => no life insurance => no protection for family

What did I learn from these cycles?

The lessons I learnt can be broadly classified into the following points:

  • When you see excesses in the market, then it is a forewarning of an upcoming recession.
  • If your only source of income is shaky, then it is hard to take risks and benefit from the recession/bust cycle.
  • Big items (houses and cars) should always be purchased in a recession or bust period. A mistake make in either of the two can take years and years to recover from…especially the house.
  • Make yourself very valuable to your company….but at the same time, be prepared to interview for a job at any time

My plan for the next recession

An often heard sating is: Attack is the best form of defense. For the next recession, I plan to attack it with a goal to benefit from the recession, rather than take it lying down. Based on the lessons learnt from past recession cycles (previous section), here is the action plan I have implemented since April of last year.

  • Lesson: When you see excesses in the market, then it is a forewarning of an upcoming recession.
    • Action plan:
      • Watch for excesses in the market
    • Results:
      • I am already seeing the excesses in the housing market and luxury items.
      • Now, I am sure we are entering the first stage of a bust cycle.
  • Lesson: If your only source of income is shaky, then it is hard to benefit from the recession/bust cycle.
    • Action plan:
      • Create an emergency fund.
      • Develop passive income streams and take out the reliance on income from work
      • Remove reliance on life insurance from the place I work.
    • Results:
      • Starting last year, I have designed and implemented a Passive Income Plan
        • On average, it will pay me roughly $500 per month.
        • Of course, this is not enough to replace my income. But, it does take care of food expenses for the family.
      • I have a 12 month Emergency Fund to take care of any temporary loss of income
        • When the income source is shaky, it is hard to take a risk like buying a house.
        • But, if you can survive for a year without a source of income, the confidence to take a risk is very high.
        • Hence the one year emergency fund.
      • I bought Life Insurance coverage to protect my family.
        • Until last year, my life insurance was provided through my work.
        • But now, life insurance is independent of my work…so, even in a loss of income scenario, my family is protected.
  • Lesson: Big items (houses and cars) should always be purchased in a recession or bust period.
    • Action Plan:
      • Have patience to wait for the next recession to buy
      • Create a good down payment fund that is big enough to reduce the monthly payments
      • Learn how to evaluate a house
    • Results
      • The highest amount of pressure to buy a new car, a new house, etc comes from peer pressure. I can take it, but my family has a hard time dealing with it. I have managed to convince them to stick with my plan until now…they have sacrificed a lot over the last couple of years. Now, I have to deliver on the house at least in the next recession.
      • I have reduced my investments a bit to start accumulating $300 more per month into my home down payment fund. When the recession strikes, I will be ready with my home down payment.
      • I am learning how to evaluate a house for purchase by doing the following:
        • Watch home inspection videos on you tube
        • Watch how pricing is done by reading articles on the net and videos as well.
        • Watch how to not get fooled by real estate agents.
          • A staged house sends warning bells ringing in my ears now….
          • For example, I found a common trick of using undersized furniture (bed, chairs, etc) to make the room look bigger.
          • Damn…these real estate agents are good huh 🙂
  • Lesson: Make yourself very valuable to your company….but at the same time, be prepared to interview for a job at any time
    • Action Plan
      • Be rated near the top 20% in your company
      • Constant Preparation to make yourself ready to take a job interview on any day.
    • Results:
      • I have been working very hard to produce more things at work…but it has been slow digging. Likewise for my interview preparation.
      • But, now that I have plans in execution for all the other lessons, I will concentrate on this action plan for the rest of this year.

If you have read this far, then you really are a patient soul. Hope this info was useful in some way. Any tips you can share, please do leave a note in the comments section.

How long does it take to get to $50000 per year in dividends?

When I defined what Financial Independence means to me (here), $50000 dividend dollars per year seemed good to me….how I came up with that number is listed in that link. I did not have any notion of how to get there apart from creating passive income streams (cash from bank interest + dividends from stocks). How I designed the passive income streams is explained here and here.

The next question for me now is: how do I get to $50000 per year OR roughly $4000 per month. This post will talk about the next steps for me.


  • Dividend Distribution Frequency
    • Dividends can be distributed with different frequencies i.e. monthly, quarterly, half-yearly, yearly. I have mutual funds with all the above frequencies.
    • So, for the entire portfolio, what distribution frequency should I assume?
      • Monthly is the most aggressive (most amount of money compounding) and Yearly is the most conservative (least amount of money compounding).
      • Most of my funds are either quarterly or less, one of them is half yearly and one is yearly.
    • So, I have decided to go conservative and assume a yearly dividend distribution.
  • Dividend Reinvestment Plan (DRIP)
    • If the dividends are re-invested into the same assets that produced the dividends in the first place, we call this the Dividend Reinvestment Plan.
    • The assumption is that I am going to use DRIP as I do not need to use the dividend money right away.
  • Dividend Tax Rate
    • Dividends are taxed at a different rate depending on the tax bracket.
    • I will assume that my dividend tax rate is 15%.
  • Average Annual Dividend Yield
    • I have assumed 3%….a reasonable, middle of the road dividend yield assuming a 2% to 5% spread.
  • Yearly Investment
    • I will assume a yearly investment of $12000 i.e. $1000 per month.
    • I will assume that I will not increase this investment money each year.
  • Investment Time Period
    • I will assume 10 years since my wish is to achieve financial independence in 10 years.
  • Tool used
    • I am going to use a wonderful dividend calculator from Dividend Ladder.
    • If I had known about this tool, I would have used this when I defined my goals…I just came to know about this recently.

Case 1: Base Case

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 10 years
  • Average annual div = 3%
  • Yearly Investment = $12000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results:

  • New Annual Dividend Income = $12725
  • New Principal = $424176

This is a far cry from the $50000 per year dividends I need to reach. So, which of the above parameters do I need to change to get the dividends closer to $50000 per year?

Case 2:  Add 5yrs to the 10yr FI plan

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 15 years
  • Average annual div = 5%
  • Yearly Investment = $24000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results, which is much closer to $50000 dividend dollars per year:

  • New Annual Dividend Income = $45483
  • New Principal = $909663

So, to get close to the $50000 per year, I need to do the following:

Contribute $24000 annually instead of $12000 as per Case 1.

  • If I buy a house, then this increase in money is impossible. If not, then this should be doable.
  • Bottom line is that for the next 15 years, $24000 per year => $360000 investment into passive income streams.
  • How this money is spread across 15 years I am not sure yet, but it is a target for me.

Work for 15 more years instead of the 10 years I had initially planned

  • This is not acceptable, but it seems like I have no choice.

Assume a dividend yield of 5% instead of 3%.

  • This is acceptable because….
  • Some of the funds I own distribute capital gains as well. This is also re-invested.
  • Some of the funds I own and federally tax exempt and one of the them is state tax exempt also. So, dividend gain of 3% and add no taxes to it, makes it equivalent to a higher yield.

Case 3:  Stick to the 10yr plan

Lets say I do not want to work an additional 5 years i.e. stick to the 10yr FI plan. If so, what numbers do I see?

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 10 years
  • Average annual div = 5%
  • Yearly Investment = $24000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results:

  • New Annual Dividend Income = $31632
  • New Principal = $632657

So, if I can adjust my need for money from $50000 per year to $31000 per year, then I can stick to the 10yr plan.


It is very hard to see 10-15 years ahead in life. Who knows what can happen in future? But, assuming that things go well (touch wood), I will continue to aim for $50000 dividend dollars per year and contribute money trying to reach it. If I reach somewhere in between $31000 to $50000 dividend dollars per year, I would be happy. If it is tending towards $31000, then I may think of increasing the yearly investment or reducing dollar requirements in future.

So, the plan is to do the following:

  • Invest $24000 per year
  • Work for the next 15 years (5 more years than my plan for FI)
    • i.e. $360000 over the next 15 years
  • Assume a 5% dividend yield instead of 3% (the safe number)

Wish me luck to finish in 10 years instead of 15!

Implementation of Passive Income Streams

There are a few core design principles I have used in designing my version of the Passive Income Streams. These principles guide me in deciding where to invest the money in my taxable accounts. Here goes.

  1. Spread the money into different risk buckets (Vanguard 1 to 5 risk buckets)
  2. For each risk bucket, have a minimum of two investment vehicles.
  3. Almost every dollar has to provide some income in return.
  4. Invest some money in Capital Appreciation (high risk) buckets
  5. All the investments coming from taxable accounts have to be TAX-EFFICIENT.
  6. Automate as many investments as possible

6. Automate as many investments as possible

As I have said before, I do not have the knowledge nor the time to acquire it for individual stock picking at this time. In addition to that, I am not very organized to keep tabs on the investments and make investment changes based on market and/or life events at this time. So, fund based investing was the way to go for me. I am ready to pay for a mutual fund that has exhibited good characteristics…whether it be managing risk, growth, etc etc.

That said, the next question was: Mutual Fund OR ETF. There has been tonnes of info published on the web about these two. In my mind, here is what appeals to me about the two options:

  • Mutual Fund
    • Best suited for regular and automated investments
    • Investment amount does not have to be on stock boundaries
    • Tax loss harvesting…up market accumulates gains in the fund, downmarket uses tax loss harvesting.
    • Capital gain distributions is out of my control…some other investor in the same mutual fund might sell and hence capital gains will be distributed to all mutual fund participants.
    • Instant fund purchases are not possible…..if stock market fell big time today, I cannot purchase more of the fund right away. There is a wait time till end of day when the fund NAV prices are published.
  • ETF
    • More tax efficient in that capital gains distributions will not happen out of my control i.e. I do not sell etf shares, I do not realize capital gains or losses.
    • More suited for a relatively active investor (compared to a lazy mutual fund investor)
      • Automated investments are not possible.
      • Investment amount has to be on exact stock boundaries…no fraction of stocks can be purchased.
      • Tax loss harvesting is the responsibility of the investor.
      • Instant (intra-day) purchases possible.
      • ETF shares have a bid-ask spread i.e. they trade like stocks. So, one has to know stock valuation techniques to evaluate ETF shares…basically, ask the question of: how much is good value for each ETF share, etc tec.
      • Each ETF shares buy/sell may cost brokerage fees…just like normal shares.

Considering the above points, I chose mutual funds as the vehicle, inspite of ETFs being considered the more Tax Efficient Vehicle. The advantages of mutual funds fit more cleanly with my current requirements of automated investments and lack of time.

5. All the investments coming from taxable accounts have to be TAX-EFFICIENT.

Being in the higher tax bracket, tax efficiency in investments would be really nice. What does tax efficiency mean to me?

  • If possible, don’t pay taxes on the gains/profits/interest/dividends 🙂
    • Bank account Interest => pay taxes
    • MUNI bond dividends => may not pay both federal and state taxes
  • If  I do have to pay taxes on the gains, limit the taxes
    • Short term capital gains taxed as ordinary income; Long term gains at a lower rate.
    • Qualified dividends (most US companies) less rate; Unqualified dividends taxed as ordinary income
    • REIT investments => taxed as ordinary income …avoid it in taxable accounts
  • Invest in some stocks fur purely capital appreciation and no dividends.
    1. No dividends => no taxable distributions.

4. Invest some money in Capital Appreciation (high risk) buckets

As I have said before, Taxable account investments are getting funded from money saved through the entire month. There have been a lot of sacrifices that went in to saving this money. So, the safe place to actually invest this money is in cash (CDs, high interest rate online banks, etc). But, low risk => low gain. So, the next level up is bonds and dividend paying stocks. But, even bonds and div paying stocks payout somewhere between 1 – 3%.

So, cash, bonds and dividend paying stocks are more tuned towards capital preservation, with small gains rather than big gains. IMO, this approach will not make you rich…or rather, it will take a long time to do so. Is there a way to score a home run and get rick faster 😉

In that vein, I have decided to set aside some percentage of the investments to fund high growth stocks….like funding a lottery ticket purchase. These stocks have the capacity to score big once in a while, but there is a high risk of loss of capital also. Since these stocks tend to be growth oriented, there will be no dividend distributions from them i.e. they can lose money but they are tax efficient 🙂

3. Almost every dollar has to provide some income in return.

Apart from the captial appreciation investments, every investment dollar has to work hard to get me some money 🙂 Each dollar can get me different amounts of money based on whether they are invested in bonds, stocks, etc. But, they have to get me some money. It does not matter also if the gains are a bit tax inefficient in the short term (say dividends) but hopefully in the long run when our tax brackets go down, the tax efficiency will kick in. I would rather get $10 and give away $3 than getting $0.

2. For each risk bucket, have a minimum of two investment vehicles

A big risk with mutual funds is that investment control is with one fund manager most of the time. If the manager lays one wrong bet, then there is cause for concern. So, for the same investment risk bucket, I would like to spread the risk by choosing two different funds that provide similar investments, but under different fund managers. For example, VCAIX is a Vanguard municipal bond fund. A similar tax efficient bond fund is VWAHX or VWITX. Splitting the investments in two similar but different vehicles will create some diversity and spread the risk.

1. Spread the money into different risk buckets (Vanguard 1 to 5 risk buckets)

Vanguard has a risk reward scale of 1 through 5, 1 being the least risky and least rewarding and 5 being the most risky and most rewarding. All my investment money is spread into the 5 different buckets based on some percentage. For example, cash (1), bonds(2), dividend funds(3), large cap capital appreciation (4), and small cap capital appreciation(5). In each risk bucket, the ultimate goal for me is to have two different investment vehicles to balance out the risk.

Investment Vehicles Update 10/18/2014
Risk Bucket Name Investment Vehicle 1 Investment Vehicle 2
Risk 1 (Cash in banks) Smarty Pig (online) Credit Union (brick & mortar)
Risk 2 (Bonds) VCAIX (ca munis) N/A
Risk 3 (Balanced Funds) VTMFX (has natl munis) N/A
Risk 4 (Dividend Investing) VDIGX (div growth) VHDYX (high curr div)
Risk 5 (Capital Growth) VTCLX (large+mid cap) VTMSX (small cap)
Risk 5 (International Funds) VTMGX (large blend) N/A

Design Principles behind Passive Income Streams

There are a few core design principles I have used in designing my version of the Passive Income Streams. These principles guide me in deciding where to invest the money in my taxable accounts. Here goes.

  1. Spread the money into different risk buckets
    1. Vanguard has a risk rating scale of 1-5 for all the investment vehicles it provides….1 being the most conservative/least risky and 5 being the least conservative/most risky.
    2. My design principle is to invest money in all risk buckets.The percentage of investments in each bucket varies depending on how the market is doing.
      1. For example, as of today (09/02/2014), the stocks are highly overvalued….don’t take my word for it…the experts thinks so too 🙂 So, more money towards buckets 2 and 3 and less in 4 and 5 risk buckets. If the market tanks, then change the skew more towards buckets 4 and 5.
      2. I can hear comments about market timing already 🙂
  2. For each risk bucket, have a minimum of two investment vehicles.
    1. Each fund manager may go through his/her own mistake prone period. By having two different investment vehicles, I am betting on the fact that both fund managers do not have their respective bad times at the same time.
  3. Almost every dollar has to provide some income in return.
    1. I want assets and not liabilities 🙂
    2. Almost all the money is spent in dividend producing vehicles: muni bond funds and dividend stock funds.
  4. Invest some money in Capital Appreciation (high risk) buckets
    1. I call this the lottery ticket investments.
    2. I.e. small cap and mid cap investments.
  5. All the investments coming from taxable accounts have to be TAX-EFFICIENT.
    1. I will talk in detail about Tax-efficient investing in another post.
    2. The basic idea is to postpone paying taxes to a more opportune time when the tax bracket is low, invest in tax-friendly investments like muni bonds, etc.
  6. Automate as many investments as possible
    1. I have no time, no knowledge, no patience, etc etc to spend a lot of time doing stock tracking and investing.
    2. So, automatic investments and hence mutual funds are my best friends.

In a subsequent post, I will talk more about the actual funds where I have invested money in, based on the above design principles.

Multiple Passive Income Streams….why?

On and off, I used to search online, in many different places, for a way to become Financially Independent. I came across many videos on youtube, many links on google, etc but nothing struck a chord in me. After a life changing event leading to some difficult times, personally and professionally, my search for peace and calm led me back to financial independence but this time, it struck a chord.

A couple of the important sites I came across were Extreme Early Retirement and Mr.Money Mustache. I cannot remember how I came across these sites, but I was hooked for a month or two on these. I realized that these sites espouse one path to Financial Independence….the path of Extreme Saving

I then came across a different set of websites that espoused multiple income streams as a path to Financial Independence i.e. earn your way to freedom. There are many sites to mention, but mainly, Dividend Mantra, Conservative Income Investor, etc etc.

I also read and listened to Rich Dad Poor Dad by Robert Kiyosaki, which espoused the difference between assets and liabilities….the philosophy being spend on income-producing assets rather than income-sucking liabilities.

So, I decided to adopt a two pronged approach to financial independence

  • Save as much as possible
  • Invest in income producing assets

Articles in this category will talk about my goal to build multiple passive income streams that together produce a yearly income of $50000.

Passive Income Streams….my choices

There are many possible ways to generate a passive income stream. The simplest example that comes to me is the Vending machine in our office 🙂 The person who owns it posted a photo of him and his family during Christmas break that thanked all the people who went to use the vending machine for “taking care of the family”. The background to the photograph was the backyard of a nice house, presumably his own. My initial thought was that it was such a nice gesture on his part to do this. But, my second thought was that this was an awesome passive income stream…there is some work needed to fill up the machine, but that is almost a weekly once visit. So, I decided to explore what are the different means of passive income streams and what applies to me. Here are my thoughts.


  • Interest money from cash stashed in a bank account
  • This option works for me.

Dividend Income

  • Dividends from bond and stock investments
  • This option works for me.

Side Business

  • An automated business that can function without full time effort from me
  • Ex: Vending machine 🙂 , a franchisee, etc etc
  • This option DOES NOT work for me. I am neither business savvy nor people savvy.

Rental Income

  • A rental income, especially one where the mortgage is paid off OR where the rent is more than the mortgage payment.
  • This option DOES NOT work for me. I am still struggling to buy a house for my family && did I say I live in one of the most expensive areas in the country 😉
  • But, this is something I will consider in future.

Based on the above thoughts, I have decided to create the following types of passive income streams

  • Interest money from Cash
  • Dividends from stocks and bonds

I will talk more details about each in the next post.