I was recently talking with a waitress at a bar I frequent often enough for the waitress to know me by name, and I remarked to her that she must have been working a lot lately because she has been there just about every time I have ever been there. She replied that she works every chance she gets, saying, “If you don’t work on Saturday, You Don’t Eat on Saturday.”
Applying that line to personal finance, I once again received a real-life look at what delayed gratification is all about, and why I try to use my disposable income to buy cash-generating assets.
When you own no cash-producing assets—no stocks, no bonds, no real estate—you must work to make money. If you work 10 hours per day at $10 per hour, you’re getting a little bit less than $100 that day, depending on your personal tax adjustments. That sucks because you have to constantly be doing something to have money come in. The moment you stop working for a few days, you suddenly have a huge cash crunch that inevitably results when money stops coming in.
But with every bond, dividend stock, or typical real estate investment that you make, you are starting to free yourself from that cycle. When you buy $300 worth of Royal Dutch Shell each month, are buying $16 worth of annual income. That $16 is your ticket to freedom—it seems really small at first, and that is what discourages people from pursuing an income investing strategy in the first place—but it represents one of the few surefire ways that you can escape the lifestyle of “If you don’t work on Saturday, you don’t eat on Saturday.”
Once you get some momentum going, you can start to see how money is a prolific thing that builds, folds, and multiplies upon itself. If you buy $300 worth of Royal Dutch Shell at $67 for twelve months, you will pick up 53 shares of the company in your first year. From there on, you have two factors that can propel your wealth forward even if you cease actively contributing to it: the dividend’s growth, and the acquisition of additional shares via dividend reinvestment.
Right now, those 53 shares would generate $190 in current income. If you’re that person working 10 hours per day at $10 per house, you just bought yourself two days of “free labor” that gets added to your account. Maybe you’ll reinvest the money to turn those 53 shares into nearly 56 shares over the course of the year—and maybe Shell will raise its quarterly dividend to $0.94 per share so that you can bring in $210 per year instead of $190 as the result of one year’s dividend reinvestment and one year’s dividend growth. That’s the initial construction of the wealth base that gets you off the track of only making money through your own labor.
Income investing is all about the gradual shift from being a worker to being an owner. Unless you inherit a large fortune or win a large lawsuit or something to that effect, you have to begin your wealth’s journey by selling your time for labor, and then doing something intelligent with the surplus. That surplus is what will determine whether you get to see $1,500 “magically” deposited into your checking account each month, or whether you have to go out and work every time you want to see money appear in your checking account. When you purchase an income-producing asset, you become the owner of the growth—you are hitching your own fortune to Procter & Gamble, Coca-Cola, Johnson & Johnson, and ExxonMobil. When they increase their profits, you get a share of those profits. If you keep adding money to those companies long enough, you’ll eventually reach a point where you see $100 come into your account every Saturday, whether you decide to go out and work or not.
Originally posted 2013-10-12 16:49:36.