YNAB BLOG

Gravy Money (Side Money or Passive Income), and Why I Love It.

Gravy money is the money you earn, but on which you don’t rely–at all.

If your budget operates under the assumption that your quarterly bonus will definitely happen, and that the quarterly bonus will be used to pay off some credit card debt accumulated in anticipation of the bonus…that is not gravy money.

But if your quarterly bonuses are saved and used to purchase a rental property every three years. That’s gravy money. Gravy money should, most of the time, be used to create more gravy money.

With gravy money, you should never need it, but you should love making it.

In general, I prefer a stream of gravy money over a one-time shot.

In my opinion, gravy money should not be consumed, but should be used to purchase appreciable assets (real estate, alternative investments, starting a business, etc.). That is, of course, after you’re out of debt.

My First Gravy Money Stream

YNAB was my first stream of gravy money. At first, it was totally necessary, and helped us avoid going into debt while I finished school and Julie stayed home with our first (and second) child.

However, once I started my full-time job at an accounting firm, we no longer needed any YNAB money, and it all became gravy money.

We used that gravy money to purchase our first home much faster than we would have been able to otherwise. Thank goodness we hadn’t consumed it to bolster our lifestyle.

I ended up taking a job back in Utah, still afraid to use YNAB’s gravy money for supporting my family. That job lasted about four to five months, and then I realized YNAB could do the trick, and we started on that full-time I think toward the end of 2007.

New Gravy Money

With us now living on YNAB money for our livelihood, my conservative radar was beeping constantly. It didn’t take long before my desire for that gravy money led me to do some other internet-based work, where a friend and I would…basically flip websites. Buy them, make them perform better, and then sell them much-improved. (For those that care, we wouldn’t flip domains, we would flip actual websites.)

We were lucky with our timing, because within a few years, the field became fairly saturated. That gravy money, the buying and selling of websites, is what helped me and Julie pay off the house.

Having that second stream of something that’s (fairly) passive, can make all the difference.

Emergency Gravy Money

YNAB continued to grow, and I didn’t need to take as much out of it to live on, though our personal earnings were still all over the board. During 2009, we were investing so heavily in YNAB 3 that our personal financial situation deteriorated fairly rapidly. Our emergency fund was drained, and right before the launch of YNAB 3, I carried about $25,000 on a credit card.

I used the stream from the buying/selling of websites to keep us from going further into debt. If we didn’t have that gravy money (that quickly morphed into “we need this to stay afloat” money), we would’ve missed our YNAB 3 launch deadline by probably six months.

(A side lesson Iearned here is to never give a public launch date unless it’s something like, “We’re launching Tuesday!” because everything’s in place ready to go. Also, make sure Apple has approved your software before giving that type of public launch date.)

Gravy Money Dried Up, New Stuff Found

The buying/selling of websites kind of fizzled out, mainly because I wanted to focus more on YNAB, and my partner wanted to make some movies.

The lack of gravy money lasted about two months, before I partnered with a developer to begin developing some small iOS apps.

The developer didn’t end up lasting too long, but we launched about five related apps and they all-together, make a whopping $150 per month. (I ended up buying out the developer of his half to simplify things.)

What’s actually pretty intriguing about this small amount of gravy money, is how much I still enjoy it. Apple deposits the money monthly, into a bank account dedicated solely to these iOS apps. It climbs and climbs, ever so slowly, and I don’t give it a second thought. But I still love that it’s there.

More Gravy Money

About a year ago, my old business partner started buying/selling websites again. I didn’t have the time to invest in the nuts and bolts, but I decided to become a silent partner in the operation. That’s ended up providing some gravy money for us. It’s nothing we personally consume in our budget, so it just grows on the side, where I reinvest it there, or dedicate it toward another gravy money stream.

Even More Gravy Money

The stream I’ve been working on currently is with real estate. I am so far from a guru, it’s not even funny, but I’ve felt like there have been some buying opportunities, so about eight months ago I jumped on a short-sale opportunity and purchased our first rental property. I’m extremely conservative in my forecasting, but based on my analysis, the property should cash flow, provide reasonable equity appreciation, and provide a nice tax benefit from the depreciation.

I’ve set up a separate LLC (for liability reasons, nothing else), and bank account. The property manager sends me an accounting each month of any costs, their management fee, and the remaining proceeds land in the account. My plan is to obviously carry a buffer of 3-6 months’ rent, reserve 10% of rent specifically for eventual repairs, and anything above and beyond that high-water mark will be used to accelerate the mortgage paydown.

(A note on carrying a mortgage on the rental property: Dave Ramsey, a guy whose advice I like a lot—I mean, come on, he’s yelling at people all the time to get on a budget!—says that once you’ve paid of your personal residence, you shouldn’t borrow money ever again, even for another house. I’ve never quite understood the logic of this. It seems to me that if it’s too risky to carry a mortgage on a single rental home, then that’s the end of it, and you shouldn’t borrow money for your personal residence either. But this is just a tangent at this point. The fact of the matter is that I evaluated the risk of carrying a mortgage, recognize that we could handle the payment if we couldn’t find tenants for a really long time, and went for it.)

The Amount of Gravy Money Seems to be Irrelevant

I find myself excited at the prospect of fairly small amounts of gravy money each month. I get excited when I see a dividend be paid–even if it’s just a few dollars. I’m excited about a few hundred dollars of positive cash flow from the rental property, and I love seeing one of our website investments earn some commissions.

The size of the gravy money really does appear to be second to the fact that it exists in the first place!

Dual Incomes: Could One Be Gravy Money?

After interviewing many new YNABers in depth, I realized how big of an expense day care is to a lot of families. The search along those lines led me to a book called The Two Income Trap: Why Middle-Class Parents Are Going Broke, and one takeaway I have from that book is that the second income from a spouse used to be gravy, but doesn’t have that designation any longer.

If you have a 3-6 month emergency fund, then when a financial disaster strikes, you’re ready for it. But if you’re dealing with a longer bout of financial strain (job loss, disability), having a gravy money stream could mean all the difference.

Would it be possible for you to consider your spouse’s income as gravy money? Could you two reasonably pretend that the money simply does not exist? Possible? Totally impossible? I’m not even certain, but want to at least plant the idea of you having some money that is not ever needed, which can be used to produce more of its own kind.

Your Business as Gravy Money (to the extent possible)

There are so many “business skills” I don’t possess, but I feel I’ve cornered the market on one, and that is keeping my business separate from my personal finances. Julie used to be confused by statements like, “Man, the business is rocking it this month!” followed shortly thereafter by, “Our restaurant category is depleted, so let’s stay home to eat.”

Those kinds of apparently contradictory statements no longer confuse her :)

The ability to separate the money that’s for consumption, and the money that can be used to create more money, is invaluable.

I’ll give you two examples:

1. I imagine that I’ll eventually sell the business. At least, that seems logical. I’m not banking on the sale of the business, so any proceeds from that hypothetical sale are seen as very distinct from our retirement savings, where we contribute to a 401k and our Betterment account. In other words, the sale of YNAB would be gravy, not something I’m relying on in order to be able to retire.

2. Since I now budget the business money, it’s very easy for me to be motivated to not take any personal distributions. Why? Because if I take money out of the business for personal reasons, I’m eating the seed corn. I’d rather keep it in the business and be able to hire another developer, try a new marketing channel, or maybe just make our company meetup awesome.

Conclusion

In the end, I just want to get you thinking about what could be your gravy money. A portion of your spouse’s paycheck? Some overtime you pick up on a fairly regular basis? Those quarterly bonus checks? Your tax refund?

If it’s gravy money, that means you won’t ever need it, except to purchase appreciating assets (if you’re still paying down your debts, I’d use extra money for that).

You want gravy money to create more of its own kind. Don’t consume it! Plant it and watch it grow!

Post a comment below on what you could use for some gravy money, and how you’d use it to help it grow.

21 Responses to “Gravy Money (Side Money or Passive Income), and Why I Love It.”

  1. Drew

    I am brand new to investing and have no idea what to do. I opened a mutual fund but have no idea how it works. I did open a betterment account from your recent article; but I still feel clueless about investing. Is there any way you could possibly provide us with some investment guidelines that are made easy to understand. I want gravy money! Thanks for your time.

    P.S. I am debt free as of February 2013!

    • jesse

      Congrats on being debt free! I’m working on an investing course (free) and hope to have it completed by the end of April :)

      • k3davis

        Oh, sweet relief, just reading these words. I’m a great budgeter (YNAB is an essential tool), but utterly brainless about investing.

      • Kate

        Yes, an investing course sounds great! I feel like we’re on a good savings trajectory, but our next step is investing.

      • Paul

        I can’t agree more. Would love investing guidance!

  2. Paul

    Jesse, Great post that comes at a time that I have been thinking a lot of this. I would love your thoughts on a question that has been plaguing me. Basically, everyone I know who has effectively pulled off coming up with gravy money, especially through a business or real estate, has invested a lot of time outside of regular work hours learning and then creating the source of the gravy money stream. It often seems to come at a significant cost of time that affects family life by taking away critical time with kids – especially in there early years were a father may already be working hardest to make ends meet. How do you square the need/desire for gravy money with the trade offs? Every thing in life costs something. Is this really worth it?

    • Ryan Oakley

      Great question. I’m in the same boat. Though I collect about $1000 check every month from my blog — it’s now passive income and I don’t have to lift a finger anymore. It just keeps coming. But I put in a tonne of hours for a few months to make that happen. And I didn’t plan on stopping – but I found the time away from family was killing me and them. So I stopped. That’s a great thing about gravy. You can stop and start whenever you want. :)

  3. Kate

    Great ideas on gravy money. I’ve always treated my tax refund as gravy money to save for a bigger purchase or re-invest. Granted, my dad’s theory is that he’d rather invest his own money for the year and then pay the IRS. But to each his own — I like an annual refund.

    Also, my husband and I are using YNAB this year to start to make more (if not all) of my income gravy money. We’d love to have a family someday and don’t want to be tied to my income to pay the bills.

  4. Lance Newman

    I’m with you there, I’m hoping to find something that has a sharp time sacrifice at first, but that tapers off with time if such thing exists, or maybe just waking up an hour earlier each day? That usually costs me an hour at the end of the day though where I become a useless ball of tiredness….

  5. Lance Newman

    Someone at work told they really enjoy reading me emails, that I have a way with words and should consider writing a book. I’m not sure if I have the time or discipline to write a book, but your interview with J-Money sparked the idea of blogging. I might try it. I figure even if it is a complete failure I can consider it my journal :) But like you say, even $10 a month would taste good knowing that it is truly “extra”.

    Jesse, you mentioned that it is wise to be out of debt before making asset purchases with your gravy money. Some say “debt free” or “out of debt” is being completely out of consumer debt EXCEPT for the house. I am leaning towards paying off my house first. What do you consider to be “out of debt”?

    • jesse

      I would consider the house as being debt free, but if you have a way of turning extra money into more extra money, it’s rough to want to pay off your mortgage when rates are so low. I think each should consider their own situation/risk tolerance.

  6. Maquis

    I am going to second the request for some investing info. Currently, most of our gravy money (which isnt much currently) goes into a savings account. It is making interest, but I know that’s not very much.

    Another thought on the question of having a spouses income be gravy… I highly recommend doing this from the beginning, if you plan on being a sahp. Before our daughter was born, my income went into savings. We never got used to having it in the budget, which meant it wasn’t difficult to get rid of that income when I started staying home.

  7. Colin Michael

    Seems like I’ve always kept a secondary income going, or at least the hope of it. I’ve run many side businesses and about half have made a little extra income. Unfortunately, I’ve never used it for investing in anything except the next thing, or in learning new skills that might be valuable down the road. Sounds like a slightly different mindset, exactly what I’d expect from the creator of YNAB ;-)

  8. Ryan Oakley

    I have a few sources of gravy money:
    – My blog http://www.photographyontheside.com makes about $1000 from affiliate sales (used on whatever Dave Ramsey baby step we are on)
    – My partners income goes straight to retirement
    – Tax refund (DR Baby Step)
    – Gifts (we try to spend that on fun stuff we don’t have in the budget)
    – Photography business (gear for photography)

    My engineering job is what we use to live on. The rest is gravy….and I LOVE gravy! :)

  9. JR

    Jesse – do you have any recommendations on learning to become a landlord and make money off of a rental. Were there books you read or other resources you used…?

    • jesse

      I read some stuff by John T. Reed and it was so-so. To be clear though, I build in a property management fee to my analysis because I don’t have the time or desire to do the landlording :)

      • JR

        Good point – I’d probably go for that too. Then it would be all about the right property, location and price. If you do that right, you’re set.

  10. Nicole

    We manage an apartment building while also both working 2 corporate jobs. Aside from free rent, we also get a small salary. Currently, we use every bit to pay off debt. However, my goal has always been to use that income as gravy money. I see no reason why we shouldn’t be able to just be banking that. Of course, spending everything we make has gotten us to where we are.
    Our ultimate goal is to get out of this business and purchase a house; therefore that money will no longer be there. So while we have it, it should be nonexistent, so to speak. YNAB is already helping me get there. Give me a 2 or 3 months and gravy money it will be!

  11. Paula

    The WSJ a couple weeks ago had an article about a web book called “Wool” (Sci-Fi about human’s having to live in a huge underground silo because the earth becomes uninhabitable) and the guy sold it, ultimately, in 5 segments. He started with one and sold it for $2.99 or something on the web… readers begged him for more and it became “Wool” which is being published in hardbound very soon. He’s making sooooooo much money on it as a digital book that he refused to sell those rights to ANY publisher, so one finally agreed to just the hardbound rights. This guy is simply a talented writer who kept at it (some of his work didn’t sell well this this idea came to him and he worked on it day and night). I like to write myself and REALLY love the idea of gaining gravy money in such a way. With one’s imagination setting other imaginations on fire! Just an idea… Investment doesn’t have to be brick and mortar.

  12. Alex

    Jesse,
    really love your YNAB (user since 2010) and your blog. Just wonderful article by the way. We are handling my wife’s income as gravy money. But now, we are stuck: We’ve accumulated roughly $75k in net worth but they are just lying around there. I am not sure how quickly I’d need them, so I feel stuck in investing them. Much rather than putting them in an investment account, I’d invest into my own side business. But that’s not happening for some reason. Any advice?

    Alex

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