Investing My Extra Income
I took some time off from investing after reaching the amount I needed to become financially secure. I reached my investment amount sometime in March of 2016. Since that personal milestone, interestingly, I have become less reliant on that money, having shifted my focus more on how I can get paid for doing what I enjoy – or at the very least have all my expenses paid for.
Investment Income Vs. Steady Income
There is nothing wrong with passive income, it’s certainly a viable option to generate money when a person isn’t able to work a job or unwilling to do so. The problem which I am foreseeing is that with more money floating around in the economy, the margins of returns on investment are slimming down and the risk or volatility is going up (not overall risk). This means that a person would have to invest a sum of cash and take on more risk to get the kind of return which could allow them to replace their expenses.
A household that wants $10,000/month coming in, month-after-month, and not able to live on anything less than that, will be hurt if their investment portfolio drops in value. Assuming they are invested in mutual funds, if the mutual fund value drops then the amount they will earn month-to-month will decrease as well.
Protecting Against Fluctuating Investment Returns
One solution is to invest a far higher amount, aiming at around $15,000/month of income to allow for the wiggle room of a wildly fluctuating investment market.
Alternatively, they can create more complicated investment strategies such as having the majority of their investment in mutual funds but also building in an annuity (fixed monthly income in return for a lump sum of cash) and keeping some TIPS (investment vehicle which allows protecting against inflation) and cash reserves. It’s doable – but it requires a savvy financial adviser who can build that kind of diversity and security into an income-generating portfolio.
Disposable income is money that isn’t pressed to go towards decreasing our liabilities or paying for our basic living expenses. If you have debt, I find it best to pay off that debt. If you have a high overhead, then decreasing it will allow you to have more disposable money.
A good argument for NOT paying off your mortgage.
I have already spent quite a bit of my money investing in myself. It has paid off as I expected. I have less fear about the economy, I have more faith in my earning abilities and I am discovering more things which I am passionate about. Passion is sort of the lube for earning an income – it just makes it easier.
I earn somewhere around $7,000/month for the various gigs I’m putting time into. I have more than enough money to cover my overhead. I want to start investing this money like I used to back in the day when I was aiming for financial independence.
Investing In Securities
My baseline investing is still in mutual funds. I understand them and I trust them enough to know that they will earn me some income in the long-run.
I am keeping track of my investments in this cute little spreadsheet I made. I track every few hundred dollars which I invest, the date, and which investment I put the money into.
I am also tracking the overall value of the brokerage account along with my asset allocation. Currently, I need to increase my bond holdings and my holdings in the Total US Stock index funds.
In the above screenshot you can see that I need to invest and extra $14k into my bonds index fund (VMLTX) and an extra $16k into my Total US Stock index fund (VTSAX) in order to get the desired 70%/30% of Equities/Bonds ratio.
Of course, as my overall investments increase, the ratios change and as one increases in value or drops in value, my ratios again change. That’s why I have come up with formulas so that I don’t have to calculate the deficits and overages every time – basic asset allocation math.
Ignore the details on the spreadsheet, I realize it’s overkill and doesn’t add much to the concept of growing wealth. The point is that it’s good to have some sort of a metric tool. Oftentimes, we send money off from one account to another and after taxes, fees and price fluctuations, it’s impossible to see any real-world gains. This can lead to the habit losing steam.
What is helpful to me, is seeing how many units of each asset I own. In the short-term, I am not too worried about the value of the investment but I am also tracking the dividend yields which I no longer automatically reinvest. Instead, I have the dividends deposited into the settlement money market account attached to my brokerage. This allows me to see the money accumulate – further reinforcing the behavior to invest.
The first step for me is to get back into the investing game. Now that I am tracking my securities and putting my extra income into them, I feel that I am ready to branch out.
In other posts, I have discussed investing in real estate, businesses etc. I have some ideas which I am working on and I’ll post about them as they come closer to being tangible.
I guess I was very timid when it came to investing in local businesses, whether endeavors that friends wanted to start or anything that was happening in my vicinity. I didn’t even know how to find out about such opportunities. That whole scene is changing for me. I am finding that by expanding my network of friends, I am getting exposed to more and more exciting potential projects.