Transcription
Hi, good morning everyone. It's Sean with Paycheck to Portfolio. Hope you've been having a great Thanksgiving holiday with your family.
Today I wanted to talk about how I turned borrowed money into passive income and how that's part of my FIRE strategy. FIRE stands for financially independent retire early. If you're new to my channel, all of my earned income goes into my brokerage account. I don't live out of a traditional checking account. I invest into what I call the three buckets. That's really just a fancy way of saying diversification. um, that comes from common sense business application and investing over many years. I invest into uh growth stocks and ETFs such as SPY, McDonald's, Costco, and others. Closed-in funds such as Cornerstone. Cornerstone drips at the NAV. So that stands for net asset value, but Cornerstone pays you an 18% dividend and then drips that dividend down at their net asset value, which is currently sitting around about a 20% premium discount. And then third, and finally, I buy a high yield funds. Now, I don't expect these funds to necessarily grow on paper. I'm looking for these high yield funds to infuse me with cash so I can stay front-loaded on my whole earned income being invested on the front end instead of investing the leftovers on the back end.
First, I want to talk about the Excel file here that we're going to go through, and I have a quote from Ray Dalio. And Ray Dalio has a background with Bridgewater Associates, the largest hedge fund in the world, managing over $150 billion. So basically, what Ray Dalio says is there's good debt and bad debt. Good debt is used to acquire assets that generate enough cash flow to pay for themselves. Bad debt is using things that don't, right? So when you think about bad debt, obviously you think about car payments, credit card bills, unnecessary spending, buying things that don't pay you back, that depreciate over time. What we're doing is we're taking, in my opinion, good debt, or what I would consider a business loan or capital investment, is what we refer to that in in in private equity, and using that to basically grow our equity in our business and to generate cash flow for us. So, if you look at the simple math down below, basically, if you invested $100,000 and you borrowed at 8.5% interest, your annual interest cost would be $8,500 a year. If you're able to generate a 24% blended yield, and uh, I aim for between 20 and 30% blended yields across my whole portfolio, that would be $24,000 a year in income. Therefore, your net profit would be $15,500 a year that you'd be generating this cash on cash returns. And so, we've got to flip our mindset from thinking like consumers and starting to think like business owners and making our cash work for us instead of being spent to zero. Right? Most people go, they trade their time for money. They get their paychecks. They spend all of their paychecks on bills. Maybe if they're lucky, they're investing seven, 10, very lucky 15% of that income, and then in 30 years, fingers crossed, they might be able to retire. What I'm doing is I'm fully investing everything on the front end, allowing my diversified portfolio to work for me, grow my equity, grow my compounding, and provide the cash flow necessary to stay fully invested on the front end. And I've noticed suddenly a wave of YouTube um folks doing the same thing. You know, good ideas spread, but the truth is, trends fade, structure lasts. I've been blessed and fortunate enough to be in an executive position in private equity and have healthcare leadership positions for many years, running millions of dollars within a company, sometimes even billions of dollars within certain companies. So, just remember, it's about the structure, the diversification, and buckets aren't bad. They're good things for the sake of running your portfolio like a business.
Let's do a quick portfolio update before we dive into the Excel file. Looking at my net account value, even with the market pullbacks recently, thankfully we're having some rebounds here recently. The portfolio is sitting at $168,073. My total unrealized gain is sitting at $29,605. If you look down here at the bottom, my year-to-date performance currently, I'm sitting basically at 33% time-weighted return. The S&P is at 16.5%. The NASDAQ's at 21%. The Dow's at 12%. And the Russell's at 12%. If you look at my one-year chart, it's about the same. Again, 29% time-weighted return. S&P is at 13.5%, the NASDAQ's at 21%, the Dow's at 6%, and the Russell's at 2.7%. If you look at two years, I'm sitting basically at 73% time-weighted return. The S&P is at 50%. The Nasdaq's at 64%, the Dow's at 35%, and the Russell's at 38%. If you look at the three-year, I'm sitting basically at 89%. The S&P is at 72%, the NASDAQ's at 109%, the Dow's at 41%, and the Russell is at 35%.
I started living completely out of my brokerage account in June of 2024. I've shared this in other videos, but my mom had had a medical emergency and I had to fly home. And so I swiped my E*TRADE debit card. And that Friday, all of my dividends came in and basically paid back that flight. On that flight, I started thinking, why am I not deploying my income like I would in any business that I've ran. I have a wholesale real estate business. I've had temp staffing healthcare businesses in the past. Like I've said, I've ran private equity and I've been in healthcare executive leadership. And that's when the light bulb went off for me that I could treat my earned income just like I did any other capital investment. And that's when the light switch went off for me. So when you look at the three years, the NASDAQ and the S&P and the Dow and the Russell really have about a year and a half head start on me. Even in this scenario, you can see how well the system is doing.
If you look at the historical values tab, basically this shows the inflows and the outflows of cash on the prior performance tab. Time-weighted return does not account for money into the system and money out of the system. It just takes the growth of your portfolio and any dividends that you've received and any expenses that have been basically deducted. Pretty much every brokerage uses that to show you the purity of your portfolio minus the inflows and the outflows of cash. Now, the historical values tab within E*TRADE includes all of the cash coming into the system and all of the cash coming out of the system while it's being fully lived off of essentially. So, you can see over the past two years, my portfolio is up from $43,000 to $168,000. But again, I started living out of the brokerage right in this area here. So you can see I was at $102,000, basically up to $168,000 by fully living out of the brokerage account. That's the power of velocity and cash flow accumulation and living out of the brokerage.
So let's jump right back into the Excel file and we'll dive into more um statistics here in just a second, but I wanted to talk about the year-to-date uh business uh data. You know, basically what I'm doing right now is on Wednesdays I'm showing a series called Spark to Fire. And what I'm doing with that is I'm taking basically my large brokerage account and I'm starting it out from scratch. So people follow along with me click by click, starting out with a fresh account. So I used to do once a month video on basically the bottom line. And that's a fancy way or jargon, I guess I should say, for in the business world, what is your net income? Essentially, you have your business revenue and your business expenses, and what is your net income at the end of the day, or often referred to as the bottom line. So, what I've done is I've taken my year-to-date financial picture and tried to put it on an Excel file so you can see it. All of my Excel files I I add to our membership Discord so folks can go in there and touch and feel it and plug their own numbers into the actual Excel file. But you can see January all the way through November is tallied up. Now, November is still a partial month. There's still dividends pending coming in. So, I made a note of that there. Another note I made here is is April Liberation Day. Under my options income, and I'll walk through this step by step, but basically you can see the year-to-date dividends. I've received $40,024. Essentially, if you break up my monthly expenses and interest that I've paid, I've paid $9,150 in interest. I had negotiated my margin interest rate down at E*TRADE to 8.4%. It's pretty easy to do if you reach out to them, either chat or call them, talk about how you're living the paycheck to portfolio system, let them know that you're going to fully live out of your brokerage account. Most of these brokerages will work with you on your margin interest rate. Now, I would get questions as to why I stayed with E*TRADE when I could switch to other brokerages for lower interest rates. The truth is is I stay with the E*TRADE one because I've been on the platform since 2008. So, I've mastered the platform. I'm comfortable with the platform. But on top of that, I get the DRIP NAV feature with Cornerstone. Other brokerages don't necessarily offer that. E*TRADE, Fidelity, Schwab, but other brokerages right now don't offer the DRIP NAV feature. So, that's why I've stayed with E*TRADE. On top of that, I recently called them and talked about how I heard people were getting lower interest rates on other brokerages. They've since lowered my margin interest rate to 5.49%. But when you look at this interest accumulation, that's coming from an 8.4% margin interest rate.
When you look at my options income, it's a little bit skewed here. And I always try to be transparent as my portfolio grows. Typically, I'm buying put options to ensure the account. In fact, I always buy put options. In the past, I would on average have two QQQ puts and two SPY puts. I buy those puts 30 days out, 10 to 20% out of the money or below the current strike price, depending on what the VIX or the volatility is doing in the market. Now, you can see that that has increased over time as my gross portfolio value grew, which we'll talk about in just a second, but you can see in April I have a skewed number of $9,500 of positive income. That's because of the April tariff situation and a liberation day. Basically, my put options covered my portfolio that amount. Now, my net portfolio dropped about $20,000, but my um put options kicked in and covered $9,500 of that that loss, which basically acted like insurance and held my portfolio stable. And that's the whole point of having put option insurance on is it's like a homeowner's insurance policy when you're fully living out of the brokerage. If you want to know more about that, again, we have a membership Discord where we talk about options specifically. And we're actively talking about options when the market's getting a little um volatile or or scary for folks. There's a lot of conversation that happens there, but I have a couple videos on my channel to talk about that specifically. The market crash cheat code and um how I protect my portfolio against a market correction or a market crash. So at the end of the day, basically after the expenses, I had $6,000 of net income there because of that volatility in April. Okay. And then talking about the taxes, I'm assuming about $1,500 in taxes. So the way I got this number is I'm making some assumptions, right? These are projections, but basically I'm saying about 75% of these dividends will be tagged as return of capital, which you can see down here in this box below. So right now I'm making the assumption 75% of my dividends are estimated at ROC. To me, that's not a bad thing at all. That's a great thing. It's just a tax advantage. ROC isn't the fund losing money. It's just a tax classification that lets you receive income without paying taxes today. It simply lowers the cost basis while a fund's actual holdings keep working. So I'm projecting only on the remaining 25% is taxed at an estimated 15%. So I'm assuming that my effective tax rate is about 3.75%. So again, ROC is tax-efficient income, not portfolio decay. You can go online and look at distributions here such as QQQI. This is their September payment. You can see that 99% is being allocated to ROC. Lots of times another criticism that will come is that these high yield funds don't perform as well as as the actual index. If you go to Morningstar's performance tab down here and you just type in QQQI or any high yield fund, basically what it will do is it will take the growth of $10,000 for you. And you can see QQQI, when you add back in dividends, is actually outperforming QQQ specifically. Not by a lot, but it's still outperforming them. So, you know, I just want to educate folks so they can go see where to look at these things and to find out for themselves because obviously, you know, folks that are well-intended don't always understand the structure of these funds. If you look at YAX again, their last distribution, basically they paid a 75% payment. They tagged that as 51% return of capital. So again, when I'm looking at my file, I always try to try to be very transparent. You can go grab that for yourself if taxes are a concern for you. But when I say I don't worry about taxes, and again, I have a video on that on my channel. I really mean that.
So the bottom line after my projections is a net of $35,482. That means that my money that would have otherwise been spent to zero produced a net of an additional $35,000 for me, and it's not even been a full 12 months yet. That allowed me so far, again, not even in a full 12 months, to fully deploy $122,400 of my earned income. My gross portfolio value is sitting at $333,763 from back in January. That's up 75.73%. If you look at my net portfolio value, I'm up basically 41%. I started out at $119,016 back in January, and you can see I'm up to $168,074. If you project that out, basically again taking the 75% accumulation on my gross portfolio and the 41% accumulation on my net portfolio, my gross portfolio, I could realistically hit a million in 26 to 32 months with that type of velocity. Now, I could hit the net $1 million in 48 to 54 months.
We're going to look at that on what I call the FIRE Model Pro right now. So, if you go to our membership Discord and you decide you would like to um get involved with that, we have a FIRE Model Pro here. I basically took our Spark to Fire version and updated it. So, again, every Wednesday I'm doing a series called Spark to Fire where I'm showing how I would start out with $2,500 and $500 a month, but I basically took the Spark to Fire holdings. Those allocations in here. You can grab the yields here with portfolio tools, and it will grab the most recent yields with the DRIP dividends there and the discount percentage to NAV net asset value for Cornerstone. And then you type in your user inputs here. And I'm just going to make this a little bit bigger so you can see it. So in this example, we're saying we're starting out with a $125,000 portfolio. We don't have any margin debt to begin with. Uh, we're saying we're going to contribute $100,000 of our income. We're going to say the inflation rate is 4%. We're going to say our annual living expenses are $80, $85,000. It grabbed the DRIP blended yield and the non-DRIP blended yield. We're saying when our paycheck comes in, 50% is going to go to growth closed-end funds. 50% is going to go to high yield funds that we're going to take as cash and pay our monthly expenses. And we're saying right now it's still 8.4%. 4% interest. You can adjust this to whatever your interest rate is if you want to see different interest rates, and it will update your 60-month model here. So just starting out in line one, basically you start out with the $125,000 gross portfolio value. Your DRIP dividends are compounding in the background. So you start out with $349 of DRIP dividends. These are just projections, but basically we're assuming only a 7% growth rate for column C. You can see in my portfolio I'm getting 30% plus. So in my opinion, this is very conservative at 7% growth compounded on the non-DRIP dividends. This is just the high yield funds. There is no um growth allocated to this. And people will say, well, what about NAV erosion? I feel like I'm accounting for that appropriately because I'm only allocating 7% growth here when I'm getting north of 30% in my portfolio. So I feel like I'm already overconservative. So if I don't calculate any growth on this, I feel very comfortable with that current calculation. The first month we would have 0% in interest paid. Therefore, the cash after interest would come straight across. We've generated $1,829. Our monthly living expenses are $7,000 a month. We've already eroded those monthly living expenses in a good way. That means we're going to float $5,200 of margin, which we would pull from our account equity. We wouldn't be paying down any margin yet. It's I don't look at it like a loan. I'm not necessarily worried about paying that off or down. I'm worried about maintaining my equity and staying fully deployed in the market. That's where the power is at. Therefore, the margin debt would be $5,254. Our W2 contributions would be rolling back in, and our net portfolio value would be $119,000. And you can see the impact to our account equity. I always keep my account equity at 50% plus. I always maintain put options as insurance, which we talked about earlier. But basically, again, there's three motors to this: DRIP dividends, non-DRIP dividends, and then your W2 contributions that you would have otherwise spent to zero are now fully invested on the front end instead of the leftovers on the back end. That's the power of it. So, if you come all the way down, you'll notice that the margin used is shrinking month over month. That's because you're creating this snowball of equity and cash flow that's coming in with this diversified three-bucket portfolio. And so basically at month 53, your non-DRIP dividends exceed your monthly living expenses, which sets you free from a 9-to-5 job in 53 months in this projection, as opposed to 30 years and having to wait for that. So in 60 months, you're projected to be at $756,000 of gross portfolio. Um, essentially you're generating $2,100 of DRIP dividends that continue to compound for you. $11,000 of non-DRIP dividends. You would see the interest that you were paying, which is minimal compared to the cash flow you've now created. Your cash after interest would be $9,814. Your monthly expenses, which includes a 4% inflation rate monthly, which is probably overkill, but I'd rather be conservative on that. You wouldn't have to use margin here if you didn't want to. You could buy additional assets with margin at that point if you want to create additional cash flow and margin arbitrage, which I will do uh for myself, but this just shows it starting to pay down the margin utilization. And then you can see your W2 contributions. This is the power. $499,000, basically $500,000 would be fully invested now that would have been spent otherwise. And then you can see your net portfolio value of $600,000 at the end of the day and 80% equity. So, it's the velocity of cash flow into your brokerage account. It's the accumulation of your own earned income that would have otherwise been spent to zero and creating a structure within your own finances just like a private equity business does with mergers and acquisitions, with growing equity and growing cash flow and creating more access to create more volume, which creates more cash flow. So, if you think about it like a business owner, you can get out of the matrix of what we're trapped in in our day-to-day lives.
We also have a dashboard here which will show you basically the breakdown between your debt and equity trend alliance. You can click on and it will show you specific information. It will show you your gross and net portfolio values. You can see your income and expenses broken down here. You can see your cash flow waterfall. Again, all of this is in our membership Discord. All of my resources are under pinned comments in all of my videos.
Let's jump back into the we talked about the FIRE Model Pro. I have my E*TRADE data here just so folks can see it and to verify it. Again, we talked about the the account values already. We saw the historical values tab that I'm up $125,000 over the course of two years. Again, I started living out of it right here in in June of of 2024. You can see the performance. My actual performance basically is at 33%. Again, on the FIRE Model Pro, I'm projecting 7% growth. So, I have some projections that put me at $1.3 million all the way up north of $3 million after 5 years with this type of growth. Again, on my projections, I tend to be conservative. That's just the way I am. That's just the way I think. And then on my balances tab, which you can grab in E*TRADE, I just wanted to show you transparently where these numbers are coming from. So my my portfolio value growth is sitting at $33,333,875. My equity is sitting at 50.82%, and my net account value currently is sitting at $168,000. You can see I grabbed this first thing this morning so I could show you transparently on um the Snowball verification. Again, this is a third party just verifying what I'm showing, right? So, if you look at Snowball Analytics, you can hook this up for free. I think they're having some Black Friday um and and Cyber Monday deals as well, but basically I'm just showing you this. I don't use it a whole lot because E*TRADE gives me all of this information. And we have very granular forms in our in our um membership Discord, but you can you can see it. It's telling you the same thing again. Gross portfolio value $333,763. Uh, they add the dividends I've received in the past as part of my portfolio profit. So you can see it's accounting for $62,482 of profit or 18.5%. Snowball uses uh a metric called internal rate of return. This is different than time-weighted return. Time-weighted return again excludes cash in and cash out. Internal rate of return includes cash flows in and cash flows out. It's basically how effective you're managing your portfolio like a business. So 21.72%. I'm very happy with that. Currently, you can see my passive income sitting right around $50,000 a year annually. This ebbs and flows with the last distribution. So, basically, E*TRADE and Snowball Analytics takes your last distribution and will annualize that out over 12 months. Some of our forms on the Discord will take the total annualized yield and divide it by 12. It there's multiple ways to skin that cat, but it tells you basically the same thing. You can see my portfolio breakdown down here. Yes, my growth buckets very healthy. My high yield buckets healthy, and my closed-end fund buckets very healthy, meaning they're all growing when you add back in dividends and total return. And then on the bottom right, this is my actual gross portfolio value growing month over month. So this just shows you what the FIRE Model Pro just demonstrated on the gross portfolio value growing and how fast it can actually grow. So, if you look back here in December of 2024, I was sitting at about $160,000 of gross portfolio value. Now, you can see I'm right around $330,000 plus of gross portfolio value and how fast I'm able to get to that when I'm fully deploying my income.
So, in closing today, I want to talk about how much the stock market's up. There's always going to be naysayers out there that talk about, well, what about bare markets? What about taxes? You're going to get liquidated. There's always going to be somebody who wants to try to give you a reason why you shouldn't start or why that something won't work, especially in the business world. And what I found for myself is that usually comes from a place of fear. Now, you have to be wise. You have to run your portfolio like a business. That's why I always maintain 50% equity or greater. I always have put option insurance on to protect me, just like homeowners insurance. We talked about that earlier. And you always have an inflow of cash coming in and dividends that are coming in as well. All those things working together allow you to weather the storm. But if you look at it holistically, basically the stock market over the last month has been down about 2%. One year ago it's up 10%. 5 years ago it's up 81%. 10 years ago it's up 217%. 20 years ago it's up 429%, and 30 years ago it's up 931%. So what's the lesson in the actual data when you center yourself on truth, in my opinion? The longer you invest in quality assets, the higher your odds of profit. So time in the market will always beat timing the market. All I'm trying to do is to take a tried-and-true method and be fully invested on the front end instead of investing the leftovers on the back end and spending my whole life working and then unfortunately most people passing away in their mid-70s. I want something different than that. I want to be able to volunteer at my church, hang out with my family, take trips. I'll never stop working. It's just how that will look differently when I'm front-loading my income.
Again, all of my resources are under my pinned comments and all of my videos. You can grab my free starter kit, which gives you basically a simple calculator to look at your own finances. It will give you a PDF that shows you basically the structure of what I'm doing. If you want to book a one-on-one strategy call with me, you can do that. That's a 30-minute call. You can join our private Discord and membership. A lot of folks in there talking, a lot of very intelligent folks, some former stockbrokers, some former hedge fund managers. So again, a high-quality group of folks with a lot of tools that you can get access to. And then if you want shoulder-to-shoulder training and coaching and mentorship with me of how I implement my own system and how we can customize that potentially for your situation, that's available for you too. I hope this video has been useful. Please like and subscribe if it has been. Thank you for your engagement. We'll talk to everybody soon. Hope you have a great day. Bye.