As anticipated, October 2017 was a high spending month since I went to visit a friend in Amsterdam. My total spending for the month was $4,163.
Core Spending – $2,566
My core spending is more important to me than my overall spending. A lower core spending means needing less income to support one’s lifestyle.
Just like I wouldn’t spend beyond my means, I wouldn’t spend the $4,163 if I didn’t have the money to do so. The spread between actual and core spending is the luxury I afford myself.
Core spending categories:
- Housing ($1,792)
- Food ($267)
- Health ($228)
- Financial adviser ($125)
- Exercise ($61)
- Internet ($50)
- Cell ($25)
- Utilities ($17)
Because I’m living in Barcelona at the moment, I have the added rent-expense on top of my HOA dues and property taxes. Without it my core spending would be closer to $946/mo.
A $946/month Lifestyle
At this point in my life I don’t care much to have a sub-$1,000/mo lifestyle. It would mean cutting out my cafe trips, dining out, fancy groceries, and entertainment.
However, knowing that I could get by on <$1,000/mo is very important to me. Especially now that I’m searching for a new career and hoping to exit medicine, it’s important to maintain a low monthly overhead.
Passive Income Of $946/month
To earn a passive income of $946/month, or $11,352/year, I would need about $250,000 invested in broad index funds. A good diversified securities portfolio should easily sustain a 4-5% rate of return per year (on average).
As CD’s are climbing up in their annual yields, a current CD portfolio of $450,000 should also sustain this income quite easily.
According to the real estate investors online, apparently 10-12% return on investment is commonplace. That means that you only need to invest $94,000 to achieve a passive income of $11,352/year.
I don’t believe such optimistic numbers and so it’s probably wiser to expect a 5-6% return on investment from a rental income portfolio. Looking at REITs, 5-6% is feasible though there would be some volatility.
Real estate crowdfunding is as popular as P2P lending was in 2008. Once again, very optimistic claims online report returns of 8-15% from such portfolios.
Here is my summary of various investment options that could support a core spending of around $12k/year:
- index funds: $300,000
- CD’s: $480,000
- Physical real estate: $200,000
- REITs: $220,000
- Real estate crowdfunding: $100,000
- Peer-to-peer lending: $170,000
Total Spending – $4,163
I could break down each category but that would be boring as shit. The main expenses I had were my flight travel to Amsterdam, hotel costs, alcohol, and dining out.
The Amsterdam trip cost me $1,400 which means an extra $116/month of expenses when distributed out over the entire year. Imagine a spendier household taking several vacations a year and suddenly that $116/mo becomes $1,000/mo.
A passive income of $4k/month from investments isn’t all that hard for a healthcare professional to achieve. It would require a portfolio of somewhere in the $1.2 million range.
In my case, would I want to trade my free time for an extra $400,000 in my portfolio? No. The lifestyle afforded with $4k/month isn’t worth the extra time.
What If …
On average, the spread between my actual expenses and my core expenses is around $2,000/month. It has been this way for the past 2 years. What could this extra $2,000/month do for me in the long-term?
Certainly not much if I were to consider only the past 2 years. $48,000 extra in my bank wouldn’t change my lifestyle by much.
If I were to pocket the extra $2,000 every month and invest it then over 2 decades I could have an extra $800,000 in my savings/investment account. It’s a bold statement to make but this extra $800k would have little value to me.
However, for a younger healthcare professional, the value of an extra $2,000/month that’s saved and invested can be extremely high. $800k could earn you a passive income of $2,600/month.
Looking Ahead, November 2017
Shit, am I actually gonna need to start budgeting again? I posted my most recent October income and it wasn’t all that sexy. I can’t continue spending $3,000-4,000/month if I want to change my career.
I have a black belt in budgeting so it shouldn’t be too hard to curb my spending. Fortunately I don’t need to save more money for retirement, but I am not ready to mobilize my investments for living expenses quite yet.
I should be back in the US in November. I won’t have my rent expense in Barcelona and I will have fewer travel expenses. If I can spend around $2,000 for the month of November, that would be quite good.