Blew Up My Passive Income, No Longer Financially Independent

My family and I could have been set for life. Instead, due to my inability to beat back real estate FOMO, I blew up our passive income. And because our passive income is now much lower, we are no longer financially independent.

Desire is the cause of all suffering. Due to my desire to own a nicer home, I sold stocks and bonds. By doing so, I lost about $150,000 a year in passive income for the foreseeable future.

In 2023, my passive income was tracking to generate about $380,000. However, by buying a real forever home this time, my passive income is estimated to decline to about $230,000 in 2024. Sadly, $230,000 is not enough to cover my family’s living expenses.

Due to purchasing a new house, I lost about five years of progress while taking on more financial responsibilities. Ugh, writing this hurts.

Alas, since starting Financial Samurai in 2009, I’ve always shared the ups and downs. Whatever you expect to happen in the future will likely be different. So stay on your toes!

This post is especially interesting for future or current parents thinking about how to juggle growing a career, raising a family, enjoy your hard work, and retiring comfortably in the future. As a father, it also highlights the pressure of being a provider and the sacrifices one must make for his family.

I’m not asking for sympathy or empathy, as I know they are hard to come by in this competitive world. All I’m asking is for you to read with an open mind to better prepare yourself for an unpredictable journey. I could just write about how life is always great. But that’s unrealistic, and frankly, annoying to read.

At the end of the day, you must do what’s best for your family.

Thought Long And Hard Before Losing My Financial Independence

If you subscribe to the Financial Samurai podcast (Apple or Spotify episode discussing the dilemma), you know I’ve thought long and hard about whether it was the right move to buy this house. At first, my wife was against it since we were happy in our old house. But over time, she came around to the idea.

Ultimately, I decided to blow up my passive income due to the following reasons:

• The house rocks partly because it is on a triple-wide lot with a view and is 100% recently remodeled
• I believe the best time to own the nicest house you can afford is when there are the most number of heartbeats at home
• As a father, I want to give my family the best life possible
• I’m bullish on artificial intelligence driving San Francisco real estate prices higher
• We’re past the bottom of the latest real estate downturn according to Fundrise CEO, Ben Miller
• I have a plan to return to work and want motivation to fulfill the plan
• I believe I’ll be able to regain financial independence over time

Actions have consequences. We must own up to the results, deal with the repercussions, and continue forward.

Household Expenses Going Up

Starting in September 2024, when our daughter attends preschool full-time, I estimate our monthly expenses will grow to $24,033 a month, or $288,396 a year. Until then, our expenses are closer to $22,000 a month, or $264,000 a year.

To generate $288,396 a year after tax requires a gross household W2 income of about $400,000 using a 28% effective tax rate. Or if we want to stay unemployed, we need to earn about $379,000 in gross investment income using a 24% effective tax rate given investment income is taxed lower.

If we hadn’t bought a new house, we were all set to have our $380,000 passive income pay for all our expenses this year and next. But now we’ve got a gaping hole.

No Longer Financially Independent

Our once $380,000 in passive income at a 24% effective tax rate would have generated $288,800 in net income. That was enough to cover our $264,000 – $288,000 in annual expenses and save.

However, now that our passive income has been reduced to about $230,000, using a 24% effective tax rate, I’m left with only $174,800 in net passive income. $174,800 is $90,200 short of my existing annual expenses and $113,200 short of my Fall 2024 future expenses.

As a result, after twelve years of financial independence, I’m sad to say I am no longer financially independent. And you know what? It’s a little depressing living paycheck-to-paycheck and carefully watching my spending now.

Definition Of Financial Independence

My strict definition of financial independence is when your passive income covers your basic living expenses. The more you desire, the more you will need and vice versa.

Being financially independent doesn’t include having a working spouse, making side income, or running a business to pay your bills. That’s all active income activity. Contrary to what some people believe, my articles don’t write themselves, not even with AI. No writing, no online income.

I’m unwilling to break the most important rule of FIRE just to win the game. Instead, I want to adhere to the rule I established in July 2009 by earning enough passive income to cover my basic living expenses.

Below is my estimated 2024 passive income streams by investment type. Every line item should be pretty accurate +/- 10% except for my venture debt and private real estate funds. Hopefully, there is upside as I’ve tried to be conservative with the distribution estimates. I also haven’t included my venture capital investments because they are still too early in the 10-year fund lifecycle.

If I had just invested the money in Fundrise or another private real estate fund instead of a forever home, I’d have kept my financial independence and potentially earn more money in the future. Now my real estate is highly concentrated in San Francisco, which can be both good or bad depending on how well the local economy performs. Hopefully AI will boost SF real estate prices.

I want to continue diversifying into Sunbelt residential and industrial real estate due to demographic trends. Thanks to technology, more people are relocating to lower-cost areas of the country because they can. I’ve invested $954,000 in private real estate since 2016.

Paying The Price With More Stress and Anxiety

Given the difficulty of finding a job after being retired for years, I’ve felt more anxiety about my new lower level of passive investment income.

The first month after my home purchase was particularly stressful as I second-guessed whether I had made the right financial move. My kids had been happy in the old house.

Interestingly, the first month after the house purchase felt eerily similar to the first month after I had negotiated my severance. I was full of uncertainty and trepidation about blowing up my career for freedom. When the final paycheck arrived, I felt like I was floating in the middle of an ocean with a defective life vest.

What have I done?! I thought to myself.

Eventually, after three months, I got accustomed to no longer having a steady paycheck. Thankfully, after five months in our new home, I have also gotten used to no longer getting a nice monthly or quarterly credit from my Treasury bond income and dividend-paying stocks.

I don’t feel happier owning a nicer home. However, I do feel greater satisfaction for providing for my family.

Household Budget For A $420,000 Household Income

Now that we’re no longer financially independent, one thought process is for one or both of us get day jobs or consult again. Thanks to inflation and greed, our family is facing ever-higher expenses.

To cover $288,396 a year in household expenses, if we had no passive investment income, I calculate my wife and I would actually need to earn roughly $420,000 a year from W2 income. Because if we go back to work, we’re also going to want to contribute to two 401(k) plans at $20,000 each or more. I treat all my investments as expenses, which is one of my tricks for investing more money.

Making $420,000 a year from one job is unlikely for us since we’ve been out of the work force for so long. But both of us making $210,000 each is feasible, but also unlikely.

Below is how I’d think we’d spend our $420,000 gross W2 income. The budget is based off my ideal lifestyle for a family of four in a big city. Of course, there are areas to cut. But overall, it is a realistic and comfortable lifestyle if we choose to remain in San Francisco.

Yes, I know, $80,400 a year in private grade school tuition for two is a ridiculous amount. However, we highly value speaking a second language. As a result, we’ve decided to send our kids to private Mandarin immersion school. Not only does a second language help with career opportunities, it also helps with thinking, making friends, and appreciating the world more.

If the school isn’t working, we can always homeschool, or send our kids to public school.

Time To Go Back To Work Or Consult

Given the self-inflicted $90,200 – $113,200 shortfall, I’ve now got to find a way to make up to $113,200 in after-tax income. Using an effective 20% tax rate, I would need to earn $141,500 in gross income from a day job or consulting.

Now you understand more clearly why I’m giving up on early retirement. I can no longer afford not to work. My wife does not want to get a day job again so the responsibility is left to me.

Once my daughter begins school full-time in Fall 2024, I will have two more days of free time. As a result, I feel it is prudent to do some consulting then to fill the void and earn.

Finding a job or consulting work that pays $141,500+ in gross income is more feasible than earning $210,000 each, let alone $420,000 total. As a result, I’m hopeful I will find the right fit.

Three Ways To Feel More Financially Independent

Although I’m technically no longer financially independent after 12 years, there are three ways to feel better about my regression. The first two ways take action. The second way takes a mental shift.

1) Sell my previous home or rent it out for cash flow.

If I rent out the previous home, I might be able to generate between $90,000 – $100,000 in gross rental income a year. If I sell instead, I might be able to net $1,300,000 after taxes, commissions, and transfer fees. The entire $1,300,000 could be reinvested in a 5% Treasury bond yielding $65,000 a year gross, or $52,000 net for one year.

The problem with selling now is that I would be selling in a still soft market with still high commission rates. It will take a couple of years after the real estate collusion lawsuit for commission rates to come down meaningfully to 3-3.5% from 5-6%.

Due to a bull market in tech stocks, the emergence of artificial intelligence, and a gradual decline in mortgage rates, it’s only a matter of time before the SF real estate market recovers. The amount of wealth creation in the area is as high as it’s ever been. It’s exciting to live in a big city with so many financial opportunities.

Hence, I’m inclined to rent out the property for a couple of years despite earning a low yield. If I rent out the property, I’ll be able to save a majority of my consulting income.

2) Do a cash-out refinance

If and when mortgage rates decline further, I could do a cash-out refinance to feel more secure. However, taking on debt after paying cash for a home feels like financial regression. I also don’t want to pay refinance fees. Hence, I’d rather rebuild my liquidity by working and saving over time.

3) Realize my net worth doesn’t change much

Despite no longer being financially independent, my net worth is roughly the same. Paying cash for a property by selling stocks and bonds is simply a net worth asset rebalance. My net worth doesn’t change much, except for any capital gains taxes and fees involved with the rebalance.

Instead, I have a cash flow problem where it’s like living paycheck-to-paycheck, but with enough assets on my balance sheet to still survive. If I need to earn more passive income, I can sell more growth stocks for higher-yielding bonds.

Or I could sell my lowest-yielding rental property if my tenants ever move out and reinvest the proceeds. However, again, I’d rather work to make more money and regrow my depleted stock and bond portfolios.

New Target For Re-Achieving Financial Independence!

I estimate it will take at least three years, but more likely five years to achieve financial independence again. As a result, the next three-to-five years will be spent earning and saving more aggressively.

In a positive way, I feel invigorated! It’s as if I’ve gone back in time as a 32-year-old who realizes there’s no way I can last in banking until age 40. I started writing about FIRE in 2009, and three years later in 2012, I left my finance job for good.

Ideally, with the help of a bull market or some unexpected opportunity, I’d like to reach FIRE again in three years because I’ll turn 50 in mid-2027. By then my children will be 9.5 and 7.

My biggest challenge will be making sure I allocate enough time and energy to them during this journey. The last thing I want is to spend so much time making money that I miss my kids growing up.

Let the new financial independence journey commence!

Reader Questions

What type of sacrifices have you made for your family? Have you ever given up your financial independence for your loved ones? Do you think your children and partner will ever fully appreciate your efforts to take care of them and provide the best life possible?

Here’s a short video clip where I talk to News Nation about my decision.

Diversify Your Investments Into Real Estate

If you want to invest in real estate more strategically, check out Fundrise. Fundrise manages private real estate funds that predominantly invests in the Sunbelt region where valuations are lower and yields are higher. It focuses on residential and industrial commercial real estate. 

Fundrise currently manages over $3.5 billion for over 500,000 investors. I’ve invested $954,000 in private real estate funds since 2016 to diversify my investments and make more money passively. After I had children, I no longer wanted to manage as many rental properties. 

Sadly, I will probably have to manage one more rental because I don’t want to sell my old home now. Instead, I want to hold on and benefit from the potential upswing in real estate as the Fed begins cutting rates in 2024.

Invest In Private Growth Companies

Also consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

Check out the Innovation Fund, which invests in the following five sectors:

• Artificial Intelligence & Machine Learning
• Modern Data Infrastructure
• Development Operations (DevOps)
• Financial Technology (FinTech)
• Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I’m extremely bullish about. In 20 years, I don’t want my kids wondering why I didn’t invest in AI or work in AI! I’m allocating $500,000 to funds that invest in AI or specific AI companies over the next five years.

To achieve financial independence sooner, join 60,000+ others and sign up for the free Financial Samurai newsletter. Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.

Update: I ended up finding renters for my old house after four months. As a result, I’m able to make up at least $30,000 in annual passive income.