This article describes in details my current Net Worth allocations, my future Net Worth allocations, and how I am going to slowly replace Active Income with Passive Income.
At this stage of my life, me and my wife are focused on ‘systematic and continuous wealth building’.
To know how wealthy you are, you need to calculate your Net Worth:
Net Worth = Everything you own – Everything you owe to others
Another name for Net Worth (or wealth) in the business jargon is Equity. On the Balance Sheet, it is calculated as:
Equity = Total Assets – Total Liabilities
We are not yet at the stage of ‘wealth preservation’. We still want to increase our Net Worth (or wealth) making the snowball bigger.
Model portfolio allocation
One of the popular mainstream strategies for building a model portfolio is to have 40% of your Net Worth (or wealth) allocated into your primary residence (your house or apartment) with the remaining 60% invested in various investment products such as Index Fund ETFs / Mutual Funds, Dividend Stocks, Municipal Bonds, Commercial Real Estate or Residential Real Estate, etc.
You can check some examples of various portfolio allocation models with historical risks and returns at Investor.vanguard.com.
My current Net Worth allocations
In my case, I am currently aiming at a 20%-80% allocation. It means that 20% of my family’s Net Worth (or wealth) to be allocated into my primary residence, and the remaining 80% invested in different Passive-Income-generating Assets.
The reason for this arrangement is very simple. While I am still young, I want put more money into work which is 80% instead of 60%. Also, owning your own house or apartment where you live is perhaps one of the worst financial decisions from the quantitative point of view, not the emotional aspect. Then, within that investable 80% I want to have both liquid and illiquid investments. By liquid I have a standard definition in mind ‘easily turned into cash within 12 months’. So, the first 40% goes into illiquid Residential Real Estate and the remaining 40% goes into liquid Bank Deposits. So, it looks like this:
Home (20%) | Primary residence.
Investments (80%) | Residential Real Estate (40%) and Bank Deposits (40%).
Any new cash that comes available from my different types of income – Net Savings from Full-Time Jobs and Part-Time Jobs, and Passive Income generated by current investments in Residential Real Estate (40%) and Bank Deposits (40%) – will be added to grow the snowball. So, it looks like this:
Active Income (80%) | Full-Time Jobs and Part-Time Jobs.
Passive Income (20%) | Residential Real Estate (10%) and Bank Deposits (10%).
My future Net Worth allocations
As I have already mentioned in my Monthly Summary, June 2021, I consider investing in companies listed on the stock markets in the US that pay dividends. As of today, investing on the stock market is my possible Next to Be revenue stream. Any dividend payments that will come from investing in Dividend Stocks will go into Passive Income.
If I decided to invest on the stock exchange, I would then divide that 80% investment part into three parts. In this way, all three income-generating assets (Residential Real Estate, Bank Deposits, Stock Market) will be generating for us Passive Income every month or quarter. So, it looks like this:
Active Income | Full-Time Jobs and Part-Time Jobs.
Passive Income | Residential Real Estate, Bank Deposits, Online Business, Stock Market
Any new earnings from Active Income and more earnings from Passive Income, will be then reinvested back immediately into any of those four Passive Income-generating Assets:
- Residential Real Estate
- Bank Deposits
- Online Business
- Stock Market (Index Fund ETFs / Mutual Funds and Dividend Stocks)
Active Income to replace Passive Income
After some time, the percentage of Passive Income in my future family income streams will increase from the current 20% slowly replacing a bigger and bigger part of Active Income.
Active Income (↓) | This will start decreasing at some point in the future.
Passive Income (↑) | This will keep on increasing.
I am hoping that my revenue-generating assets will generate more than enough Passive Income every year to cover annual spending of our family.
We are expecting to reach the status of financial independence starting from next year when our Financial Independence (FI) Ratio is forecasted to hit 100% in 2022.
This year in 2021 our FI Ratio is 87%.
Our forecasted FI Ratio for 2023, 2024 and 2025 is going to be around 175% each year on average. However, due to the growth of our current family of three our spending will increase. Therefore, realistically I am looking at our FI Ratio to end up around 150% each year on average. This will get us 50% margin of safety which is decent. Despite being fully financially independent, we are planning to continue working in the next few years because we want our savings to grow and enlarge the snowball.
Numbers do not matter regarding Net Worth growth. Decisions do!
As you have probably noticed, I do not mention any specific numbers regarding my family’s Net Worth (or wealth), nor values of our Assets or Liabilities, or even the level of our annual income and spending. It is because everybody’s life situation is different. We live in different countries, do different jobs, have different family size, have different earning, saving and investing capabilities.
What is very important, is actually following the right behaviors and making proper decisions when it comes to earning money, saving money and investing money – always in that order. It is way more important than giving examples using specific amounts of money in my portfolio.
To finish up, according to my past results and future forecasts, it takes around 10 years to build a Net Worth (or wealth) of approximately USD$1,000,000. But, it takes only 5 years to grow from USD$1,000,000 to USD$2,000,000. And even less time than that to go from USD$2,000,000 to USD$3,000,000. All of that thanks to the magic of compound interest. Bear that in mind!
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The above article represents my own views and attitudes as of June, 2021. It is not an investment advice. I am not an investment advisor. My articles have rather educational purposes rather than are advisory in nature.
Your money decisions are yours alone and I am not in any way responsible for your present or future actions. Stay on the righteous path, think long and long-term before making any financial decisions. And, remember to trade responsibly! More in DISCLAIMER.
