Based on my own conversations with wealthy individuals regarding the arrangement of their estates, I have gathered that the process of building wealth is best done when the strategy is put on semi-autopilot, and I am outlining that process below:
First, you create a bank account for your investments that is separate from your bank account that is used to meet daily expenses. Your primary bank account takes on the function of a working capital account. It is used to pay your utility bills, car payments, food purchases, mortgage, and the other needs and wants of life.
Second, you allocate a portion of your disposable income to get transferred from your primary working capital account (where your primary career income is deposited) into this second bank account that you created.
Third, you deduct a certain amount to invest each month that is less than the amount being added to your account. Let’s say you are transferring $1,000 per month from your labor sources into your investment bank account. What you would do is set aside $500 per month into DRIP into $100 monthly ownership positions in blue-chip stocks like Johnson & Johnson, ExxonMobil, Nestle, Wells Fargo, and Colgate-Palmolive. The remaining $500 is earmarked for individually selected value investing opportunities and the build-up of a cash reserve. Depending on your present cash-generating abilities, the figures can scale higher or lower.
Fourth, you dutifully reinvest the dividends into the security that paid them, while you keep repeating step three. At some point, your passive income generated from your business holdings will pass $1,000 per month. This is a stylistic choice, but at this point, I think the automatic reinvestment of dividends into the paying security is no longer necessary and the dividends should be directly funnelled into the account.
Fifth, this is the point at which you can now engage in the behaviors of the capitalist class. You have $1,000 per month coming in to allocate for investment, and you also have the $1,000 from your labor coming in that can also be put to work. At this point, you start to notice that the passive income is growing all on its own, fast surpassing the contributions that you are able to make from your labor.
This is the point at which your life shifts to permanent offense. The passage of thirty days means that a meaningful collection of cash has built up, in the manner of a self-charging battery, for you to deploy into new cash-generating investments that will hasten the rapidity at which your net worth advances.
You don’t have to do something exactly like this–it’s your life, there are few hard rules, and the people who have built their wealth have done it in a wide variety of ways. But my view is that it helps to get something systematic and specific going so that there is a process in place to make your transition from active to passive sources. Absent a plan, I have found that people just haphazardly make occasional lump-sum investments as the money presents itself, and this usually results in a much lower savings rate than you’d have if you follow my suggestion to execute a specific plan.