5 Reasons Why Investing for Income Beats Investing for Growth
Why do you invest?
Such a simple question, right? When asked this, most people’s response has something to do with retirement. But this is normally a canned answer simply because we know we are supposed to save and invest for retirement. The problem is that there is no deeper meaning or motivation behind this type of investment strategy. There’s no excitement. No drive. And I firmly believe this is the primary reason why so many people are underfunded for retirement.
So then, a better question might be what type of investment plan gets you motivated to put your money to work? Chances are you aren’t sure the answer to this one, but you know that your current plan of saving to a grouping of mutual funds in your work retirement plan for 20+ years isn’t doing the trick.
That’s where investing for income can come into play and change things. It did for me! I found that investing is just more fun when I could see an immediate and tangible return on my money. And so this frame of thought guides us directly into the first of 5 reasons why I believe investing for income beats investing for growth.
Simply put, it is immensely more motivating to put money to work when an investor knows they will be able to reap the rewards of their efforts almost immediately. This is where traditional retirement plans fail. When talking to a 30 year-old, there is nothing that will drain the life of out that person quite like telling them they should save 10-20% of their hard-earned income, never to touch it or see anything from it for 35 years. It’s completely discouraging, and thus creates bad savings behaviors.
But this opposite happens when you tell that same 30 year-old that they should save 10-20% of their hard-earned income into vehicles that will boost their income today. Their eyes light up with this discovery that immediate gratification can be tied to financial responsibility! It’s as if they are being introduced to a newfound superpower. This is where investing for income wins. It often creates the motivation needed to boost positive financial savings/behaviors which is the heart and soul of where financial success is achieved.
2. FINANCIAL INDEPENDENCE (ON YOUR SCHEDULE)
Generating income outside of the day job is such a liberating experience. One, it’s just awesome to increase cash flow. Two, increasing said cash flow outside of work also decreases the dependency on work income. With some time and dedication, one can get to the point where investment income meets household living needs. This is where true financial independence becomes a reality.
Income-oriented investments are also typically held outside of traditional retirement accounts so they aren’t tied to traditional retirement rules. Most retirement investment accounts don’t allow for withdrawals until age 59 1/2 without a penalty (or some restrictive and tedious maneuvering). Blah. When investing outside of these accounts we have full control over our money and our investments. This frees us to develop a road map to financial independence at our own pace, which can be much earlier than those dictated by traditional retirement rules.
Being reliant on a single source of income poses a substantial financial risk, as one of the most devastating financial events that can happen to an individual (or household) is the loss of a job. Having multiple income streams in play helps offset this risk. The bills can likely be paid rather seamlessly to get a person through that trying time. This provides some invaluable financial protection and more importantly, peace of mind. In that same situation, a growth-oriented retirement portfolio is going to be limited in scope on how it can provide assistance.
4. IMPROVED MATH
A commonly accepted principle in financial planning is that one has reached the point of financial independence when the total of their retirement savings/investments has reached 25 times their annual household living needs. This is referred to as the Four Percent Rule. In other words, the rule states that if a person needs $40k to live on, they should aim to save a total of $1 million in retirement savings/investments so they could withdraw $40k/year (adjusted for inflation) for life and not have to worry about their assets running dry.
This is a fine approach, but I will argue that quality, income-oriented investments can improve upon this picture. And here’s the simple math as to why.
That same person needing $40k/year to live could alternatively look to invest in assets that generate an 8% cash-on-cash rate of payout. This means they would only need to save up a total of $500k (instead of $1 million) to get to the point where their investments meet their annual household living needs. Of course, there are miscellaneous factors that will impact our investor’s exact timeline (returns, taxes, inflation, etc.), but with their savings requirement halved it’s rather clear to see that his/her timeline to financial independence can be reduced by a focus on income over growth.
Although mentioned last, this might be the most impactful of the bunch. The development of multiple income streams brings more abundance to a person’s life. What an individual does with that abundance is up to them. They might decide to donate more money to their favorite cause. They might decide to continue to invest in their newfound love for their investment strategy. They might decide to splurge and take the family vacation they’ve always wanted. There is no wrong answer! All enhance their quality of life.
Bottom line, investors increase their financial odds of success substantially if they are excited and motivated about how they are putting their money to work. It makes them want to earn more and save more which is the foundation for financial success. And in my experience in dealing with all sorts of investors, I have indeed noticed that income-producing investments have that special ability to truly fulfill a person’s present-day happiness in ways that can’t be matched by long-term, growth-oriented investments.
And that can be the ultimate motivator.
Are you motivated by your current investment strategy? If not, maybe it’s time to reevaluate how your money is working for you. Take a look at my article on growing your passive income streams for some ideas that can help you transition towards becoming an income-oriented investor.