Main Investment Account, And Growing Income Replacement
Adrian B Early, Ph.D., MBA, CFP®
Chief Investment Officer, shareGRO™ Practice
Money makes money. And the money that money makes, makes money.
– Benjamin Franklin
Annual income twenty pounds, annual expenditure nineteen six, result happiness.
Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
– Charles Dickens
With the emergency fund in place, the key step in growing wealth is building a large, flexible investment account, ideally usable now. The funds should be accessible as needed for emergencies greater than the emergency fund can supply. Beyond that, there is value in knowing what your investments are doing, and forming the habit of living, at least in part, based on investments. Many wealthy people invest, any income they receive, and live based on those investments alone. It is a healthy mindset to spend based on a budget of (not more than the) passive income from investments. If a draw from investments is low enough that return on the investments is highly likely to exceed the use of funds from investments, then the funds are likely to continue growing in perpetuity (forever), and not deplete. That goal defines financial freedom. By starting now to live IN PART from passive income drawn from investments, you can watch that passive income grow toward, and reach 100% of expenses. Once reaching full coverage, you are financially free, by definition to do as you want, within the budget.
To be clear, I am suggesting you can order a monthly draw from your investment account into checking as income, some percentage of the account value, say 5% (less being safer, but less motivating initially). This is an amount you see each month. It is a reminder of what your investment account can, and is doing for you. This is income you can live on, even if other income were cut off. As you see this amount grow, you are aware of the amount or percentage of the budget this passive income or draw allows.
Adding 5% accumulated investment to income (with 10% investment returns) brings total spendable income and accumulated assets over time for different amounts of income saved as shown here:
Watching passive income grow should motivate growing investments faster. To cover more budget, and approach full financial freedom sooner. The simple way to do this is to neglect to spend often. Anytime you think you might want to splurge, you can choose to not spend at all, or spend less. In doing so, you are acting to become richer, financially free. Moving excess from checking to investments (even yourself manually) captures the value of reduced consumption as wealth and an increase in passive income. To capture motivation in instant actions without needing vigilance to make the transfers, is ideal, making them automatic, transferring excess from checking above a set amount, monthly to investments.
May growing your investment account and passive income, bring you joy and financial freedom.
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