There is one main reason to invest your money, and that is so you have more to spend someday. It makes sense and is achievable for everyone to build wealth through investing, and maybe you don't want to work anymore. At the very least, you would like to not have to depend on a paycheck. Several options exist for creating a sustainable income through investing in assets that provide you with good, consistent returns.
- Dividends, interest income, and rents are all asset classes that can provide a sustainable income for retirees when they're used correctly.
- Investing in stocks or in a local business can produce dividends, and buying real estate can result in rental income from a tenant.
- Interest income is the safest class when it's produced by bank products such as certificates of deposit or by government bonds.
- It’s important to consider inflation when you’re planning what assets you want to use to meet your retirement goals.
How to Get Started
Your job as an investor is to buy or create sources of dividends, interest income, and rents. There are a few other options, but these three asset classes of dividends, interest income, and rents cover the investing needs for a vast majority of the population. You can do one or all of the following:
- Generate dividends by investing in stocks or private businesses such as a local bar held through an LLC.
- Generate interest income by loaning money to banks in the form of certificates of deposit, to corporations or governments (e.g., investing in bonds and municipal bonds), or to individuals, in the form of peer-to-peer loans.
- Generate rent by investing in real estate and letting other people use property that is yours while paying you for it, whether an apartment, office or storage unit.
People talk all day long about the wealth of Warren Buffett or Bill Gates. That wealth is simply income generated by underlying assets they own.
Both men own all three types of assets and collect billions of dollars each year. Some less well-known millionaires prefer to build up a portfolio of mid-tier hotels or restaurant franchises. Others are more content owning investments at the local bank and taking lucrative dividends on a portfolio of stock shares.
Applying the Philosophy
When it comes to putting this into practice in everyday life, you might want to practice a few analysis steps for different potential investment opportunities. Say, for example, that you are considering buying $25,000 worth of shares of Johnson & Johnson stock.
Suppose that, based on the current dividend yield, you would be "buying" cash dividend income of $908 per year plus any growth. The company has raised its dividend every year for decades, so you could try and project out the future dividend income.
By taking this approach, you can compare different investments. Calculate the annual cash flow that would come from other dividend stocks and interest-bearing instruments such as bank CDs. Put time into looking at potential real estate investments and figure out what kind of rent-producing buildings fit within your means, and how much monthly cash flow these investments could provide.
Don't Forget About Inflation and Taxes
Once you have begun collecting your dividends, interest, and rents, adjust them once a year for the rate of inflation and compare your "real," after-tax income from year to year. Over time, the graph should be pointing upward so that your standard of living is increasing as you age.
Inflation counts, especially when you want to know how far your dollars go. It doesn't matter as much how many dollars you have in the bank. What matters more is how many cheeseburgers you can buy with those dollars. It is your money's purchasing power that counts.
How you get there, and what your ultimate investment portfolio turns out to be, is what remains to be uncovered. There are many self-made millionaires who have never owned a single share of publicly traded stock in their lifetime and never plan on doing so, either. How you put this in practice is entirely up to you, your temperament, and your resources.