Some recent posts from Cash Rebel and Reach Financial Independence have really gotten me thinking about how much money we should be keeping in emergency savings and how fast we could go into survival mode if we had a sudden loss of income. Now that we have paid off all of our debt other than mortgages, I’m curious to see if we could get by on passive income alone. After all, isn’t that the ultimate goal of financial independence?
Our ultimate goal would be to make enough passive income, mostly from rentals, to pay our necessary expenses. Anything we earned from salary or other endeavors would go into investments or retirement. While the timeline fluctuates based on the mood of the day, I think it’s reasonable to say we will have our mortgages paid off within the next 10 years. At that point, we can get by on very little. Because I sadistically like to look at worst case scenarios, what if we were suddenly faced with no salary income? Could we make it without resorting to panhandling?
Bare Bones Budget
If my husband and I both lost our jobs tomorrow, we’d have to go into survival mode. Our necessary monthly expenses would include:
Primary Mortgage: $1606 (We could sell our house and move into something smaller, but it would take a while.)
Electric, Propane, Water, Trash removal: $396
Food: $250 (I could cut out most fresh produce and meats, not healthy, but we can’t afford that.)
Car insurance and gas: $150 (I would decrease our limits and drop our umbrella policy. If we’re not working, we wouldn’t drive very much)
Internet: $22.50 (I could go to the library if we really had to cut this out.)
Phone: $50 (We would get a basic, pay as you go plan)
Misc: $100 (I’m sure I forgot something.)
Things We Really Should Have
I guess we could cut out these expenses, but I really think it would be a bad idea, especially with no jobs.
Health Insurance: $350 (Currently, my daugher and I pay $190/month. My husband is covered fully by his work. I’m guessing at the cost to add him to our policy.)
Life Insurance: $77 (We have term life insurance policies.)
Dogs: $100. (It would almost kill me, but I’d have to choose the people in my house over the pets if it came to it. We’d have to turn Mo in to the shelter, and since Ralph is on borrowed time and requires medicines, he’d likely be put down. It would have to be dire before I’d choose that option.)
Total for Almost Necessities: $527
New Total $3179.50
Passive and Alternative Income
I’m going to assume that I lose my jobs after my business sale goes through because I’m not going to fire myself.
Commercial Rental Net Income: $1662
Residental Rental Net Income: $367
Seller Finance Business Payments: $2500
Online and other: $500
I’ve honesly never put those numbers down, and it makes me feel pretty good looking at them. We’d have an almost $1850 surplus, even if we had no salary income. Of course, we could also lose tenants, have expensive rental repairs, or the doctor who buys my practice could quit paying me, so it’s not without risk. The business payment will eventually be paid off, so that isn’t an infinite resource.
It would also be pretty sad to live long on our bare bones budget. The thought of ramen, pasta, or hot dogs as our only meal selections leaves a bit of a bad taste in my mouth. We enjoy travel. We watch TV and rent movies. I go to spinning class. Our daughter does all sorts of activities. I’d hate to live without all that.
What’s the Point?
There really isn’t one other than to make me sleep better at night. I know in the unlikely event that my husband and I both lost our jobs at the same time, we’d be OK until we found something else.
The better point is that if I’d done this exercise three years ago, it would have included at least $1000 a month in credit card payments, $700/month in student loan payments, and $300-$700/month in car payments, depending on who had a new car at which moment. We also would have no residential rental because we would have never saved enough for the down payment. If you run those numbers, it gets a bit more scary.
I don’t like to be one to focus on doom and gloom, but I encourage you to do the exercise yourself. If you don’t like what you see, start making some changes. It won’t happen over night, but I’m living proof that you can change your financial future. A good night’s sleep is priceless.
What would you cut out to make a bare bones budget? Do you have enough saved or in passive investments to overcome a huge income loss?