Posted by Robert on December 14, 2010
This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
Some people see money as a renewable resource. Those people earn and spend. Others see money as a non-renewable resource. Those people earn and save. There are people who see money as a “seed” resource. These are people who use their money to invest. This is sometimes referred to as “putting your money to work for you.”
Suppose you found an old oil lamp. It’s covered in dust, so you rub it and out pops a genie. The genie tells you he will grant three wishes. What will your first wish be? If you would wish for more wishes, this is the same idea as using money to earn more money. This is done by investing. When my money can work and earn more money, there are two possible outcomes. Either I can earn more in the same amount of time, or I can earn the same income by working less.
This is where the modern self-funded retirement comes from. When people were provided a company pension, they didn’t need to invest. Now, more and more people are pushed by their companies to invest for their own retirement. They are encouraged to save and the funds are invested with the hope that it will fund a retirement around age 65. However, many people don’t have the mindset or the interest to invest, and they adopt the default strategy of hope.
My wife and I started out seeing money as a non-renewable resource, so we saved as much as we could of what we earned. Then we began to invest it, eventually in dividend-paying stocks. It soon became apparent how our money earns more money. If we don’t spend that money, it compounds to earn even more money. This is how our money works for us and earns money for us. This is eventually how we will stop working (retire) and continue to have an income.
The be clear, dividend income is not the only way to use money as a seed resource. Other possibilities include interest income, rental income and royalty income. Any passive source of income is able to replace earned income, allowing a person to become financially independent and possibly retire.
Once we retire, no matter how early or late, we will have an income (from dividends, in our case) that is likely lower than the earned income we have now. The major difference will be that we don’t have to save any amount, because we will have already completed that. We won’t need to save for an unexpected illness or other interruption in income, because that will no longer be a risk. This will require a total change in the way we relate to money. Every month, our dividends will be deposited to our bank account. Even if we haven’t spend everything by the end of the month, we will still have the same amount deposited the following month. So where we originally saw money as a non-renewable resource and then a seed resource, we will come to see our money as a renewable resource, coming in regardless of our actions or circumstances.
When you don’t spend all your money, do you save or invest? How are you preparing an income for your early retirement?