What is the “Golden Rule of Investing”?
“Think of all money you earn as a Potential source of Future Income”
Don’t think in terms of how much money you have or have saved but rather how much money you can generate from what you have.
In other words, when you receive your pay check, of course you have to pay your bills. And some bills you will always have – electric, water, gas, phone, mortgage but those that you don’t is where you can get the money to finance your future. A great example is your car. A lot of people buy a car – and of course they buy into the marketing that owning that luxury or high priced sports car is more fulfilling somehow. But what you need to consider how much future income did you give up for that little bit of prestige you got from the fancy car? That extra $ 10,000 or $20,000 you spent just stole from your future income source. When you make purchases, no matter how small or large you should think about the true cost. Now if you had kept in mind my Golden Rule you hopefully would have come to the conclusion that you were better off with the lower cost car and saved yourself that $20,000 dollars. If you had then let us see what it would have done for you.
Each one thousand dollars if invested at 8 % yielding stocks would provide you with $80.00 per year in income or $6.66 per month for the rest of your life. It may not sound like much but consider that was just the one thousand. Now, let’s multiply those thousand dollars by twenty. That creates an income stream of $1,600 per year or $133.33 dollars per month! Could you use that extra $133.33 per month for the rest of your life? But wait, it doesn’t stop there! Because of “Compounding” your income stream will be constantly growing also! Most stocks pay their Dividends on a quarterly basis so we will see what happens over time to your income based on quarterly payments of Dividends. Even though I like to express Dividend Income in Monthly Income because I believe most of us can relate to that better, the reality is that most companies pay their Dividends on a quarterly basis. So we invested in this company (we will call “Company A”) and it is paying its dividend each quarter of $.40 per share (I will explain how dividends work in more detail in a later chapter) we would earn $400 the first quarter. If you used that money to buy more shares, your shares would increase by 20 shares so in the next quarter your dividend income would be $408.00, 2nd quarter it would be $416.16, 3rd quarter it would be $424.32 and the 4th quarter it would be $432.80! On an annual basis your income would now be $1,729.73 per year or $ 144.14 per month. This is a monthly increase of $10.81 per month! So as you can see not only will the money you saved provide you with a monthly income for the rest of your life it will also grow and provide you increases in income for the rest of your life ! Don’t worry if you don’t understand how dividends work or the how the math works as we will be discussing that later on. The important thing for now is to understand that by investing money correctly (and not spending it unwisely) your money can grow to provide you with an income stream so that you will never have to worry about money again and insure a bright future for you and your family.
“Don’t ever spend a Cent if you are not forced to”! – If you spend it – you lose it, but if you save it, it will pay you for the rest of your life!
Investing by not spending money is a Mind set. Place signage everywhere for you to remember if you have to – Place a sign in your office, put notes on your computer, or even in your purse or wallet if you have to , to remind yourself your goal of not spending money unnecessarily.
Think in terms of accomplishing small goals to work towards your main goal. If you want to save $50,000 to invest – well that seems like a task that is very hard to accomplish for most of us. But if you think smaller it becomes much easier. I like to save $1000 at a time. When I reach that $1000 goal I invest it. Do that 50 times and you have reached your goal.
Another way of thinking about this is every dollar you spend unnecessarily now will cost you a lifetime of income. Spending $100 today will cost you about $16 per month in income at retirement or will reduce your income by $200 per year in retirement! That might not sound like a lot, but how many hundreds of dollars do you spend unnecessarily each year? Smokers or expensive coffee drinkers can easily spend $4 a day or $1,500 a year on their habit – that equates to 15x$100 or $240 per month in retirement income or $2,800 per year in income – Your habit for 10 years could cost you $2,400 per month or $28,000 per year in potential retirement income. As you can see, your choices today can have “Compounded” effects on your future! This is just one small item that I used for an example, take a moment and try to reflect on your habits and determine just where you are potentially spending your future unnecessarily. Most of us will be surprised as to just how much money we are spending on things we really don’t even need.
So, in summary we should all think in terms of any money we have as being a vessel to earn future income. When you spend it ( yes, I realize sometimes it is absolutely necessary) we lose the ability for our money to generate income. Always remember the “Golden Rule of Investing” prior to making a purchase and realize what you are really giving up to buy that sill fad or knickknack that will probably add little or no value to your life.
Thanks for reading and be sure to share your thoughts and comments with us.