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Wednesday, 29 August 2007

Eating the Seed Corn

While it's good to look for sources of extra income, especially passive income, counting interest and dividends as part of your disposable income might be a mistake. I choose to only consider my income from salary as 'disposable' and have a savings target based on that income. This is because the income flowing from investment properties, shares and savings accounts forms part of the overall ROI of such investments. If you base your financial plans on the likely (eg. historic) returns of the assets in your investment portfolio, bear in mind that such figures generally assume all dividends or interest are reinvested. If you spend the some of the income being generated by your investment portfolio while it is still in the accumulation phase you will reduce the ROI of your portfolio. Even a small decrease in annual ROI will, over a long period of time, significantly decrease the final value of your portfolio.

Copyright Enough Wealth 2007


2 comments:

mapgirl said...

Great headline. All too true for most people. But instead of investing, I think of it more for plain old savings. It won't grow if you keep biting into the principal.

mOOm said...

In my view the whole point of having wealth outside of a retirement account is that you can use some of the income and maybe some of the capital some times for things you want to do before you are 60. For example, our move to Australia. I can make this move and try my hand at trading full time for a while because I have the capital available. In my monthly reports I break down income into different categories - current and superannuation - and investment and non-investment (Probably I should break out trading too...). In the long run I want to see both retirement and non-retirement accounts grow. But iin the short-run as long as the retirement account is continuing to grow the growth rate of the non-retirement account is less important. Obviously though if you spend all the income all the time you won't accumulate much...