The Most Important Thing About Money and Investing

The average household income for readers of this site $82,000 per year. That makes sense—there are only three reasons why someone would want to read about money: (1) they have money, (2) they anticipate having money, and/or (3) they act on behalf of people who do have money.

Politically, the typical reader of this site is conservative (I mean, heck, it’s in the name of the site)—however, the typical reader on this site is liberal compared to other websites on the internet that claim folks in the $75,000-$99,999 household income bracket as their regular audience. Statistically, when you leave my site, you are most likely to go directly to another site that involves: (1) finance, (2) news, (3) undressed women, or (4) sports (in that order).

Most of you are from California, New York, Illinois, Canada, Florida, or Germany. There is also one regular reader from Ireland. Erin go Bragh, my man.

However, despite the differences among you, there is one similarity that links you all: everyone reading this site wants to be in a better financial position next year, the year after that, and into the indefinite future. While every person you will ever meet (short of monks that have taken vows of poverty) probably agrees with that sentiment in the abstract, you are actually reading online about how to make that a reality, and based on the average demographic information, you have the financial means to make it happen.

So then the next part becomes: How do I make that happen?

The answer is two-fold: You have to create big ‘ole spread between where your lifestyle spending and the money you bring in, and you have to acquire ownership stakes in things that can be capitalized. To increase your chances of success, you will hopefully do this in a diversified and relentless manner.

(1)    If you are among the typical demographics and bring home $82,000 in household income per year, that means saving around $10,000 per year to see real, sustainable changes in your household situation on a regular basis. That’s a household savings rate of 12.19%. If we are only a generation or two removed from having relatives that stormed Normandy, we ought to have it in our DNA to save a measly $0.12 on every dollar brought in.

(2)    The second element is business ownership, something that is a substantial focus of this site. Paul Allen, the co-founder of Microsoft along with Bill Gates, once quipped: “No one got rich by putting all their money in a savings account.” The gradual acquisition of cash-generating assets over the course of a lifetime means everything—it’s the kind of thing that allows you to wake up one morning and wonder, “What the hell? I got more money coming into my bank account every month from rents, interest, dividends, and distributions than I make from my job. When did that happen?”

Normally, when we discuss the difference between active and passive income, we speak solely in terms of labor. We say things like—for a grocer to make $100 in a day—she has to actually show up and work for eight hours. If, after your first week as a grocer, you decide you don’t want to put people’s stuff in plastic bags—the money stops coming. That’s at. No labor, no money.

With passive income, it’s different. If you own 14,000 shares of Johnson & Johnson, you are going to collect $100+ per day (paid out four times per year) regardless of whether you decide to do anything with your life—all you have to do is stay alive and not relinquish those shares.

But there is a second difference between active income from your labor and business income that you should keep in mind as well: when you are selling your labor as an employee, you are working for someone that is trying to pay you as little as possible. Employers don’t wake up one morning and say, “Gee, our grocery store made $12,000,000 this year. We only wanted to make $10,000,000. Let’s spread that other $2,000,000 between our employees since we made too much profit.” The employer’s job is to pay you as little as possible without alienating or insulting you if you have a specialized talent, and without getting you to quit if you are working a job that does not require a unique skill set. If you make $75,000 per year at your job, your employer isn’t sitting in the office all day thinking, “How can I get my employees to go from making $75,000 to $100,000?”

Business ownership is different. It’s all about trying to make more money. If you own those 14,000 shares of Johnson & Johnson, you are effectively employing a management team that is trying to put more money in your pocket all day long. If the CEO doesn’t achieve 8%, 9%, 10%, or whatever the target growth amount is, he will eventually get fired. In fact, the management team is trying so hard to make you more money, that sometimes they will resort to actions to increase profits that earns rebukes from the community—employee layoffs, cutting of medical plans, and even negligence in the factories when it comes to selling safe products. The morality of those topics can make for one hell of a debate—but the point is that the intent is to make more money for shareholders. But when you are just an employee, there is no one out there whose overriding intent is for you to make more money.

Your end game should be to turn your personal balance sheet into a financial fortress. Everything I have to say about personal finance can be boiled down into this paragraph:

(1)    Create a job that allows you to pool your money into business ownership stakes, hopefully reaching a point where you can set aside $10,000+ per year from your labor to acquire business ownership stakes.

(2)    Understand the major tax shelters available, and take advantage of them. The less money that you let the government take, the more you have working for you. Putting $5,000 worth of AT&T stock into a Roth IRA and letting it grow for 25 years will yield much better results than putting $5,000 into a regular, taxable brokerage account because most of AT&T’s returns come from the dividend, and avoiding a tax of 18.8% on that income each year will make a huge difference when the holding period is measured in decades.

(3)    Own the most dominant enterprises on this earth—they should drown their owners in cash, as Charlie Munger likes to say. That means Coca-Cola. That means ExxonMobil. That means Visa. That means Disney. That means Johnson & Johnson. That means Procter & Gamble. That means Chevron. Depending on your skill set, it could be quite advantageous to acquire a few rental properties over the course of your life, because they give you monthly rental income that can also shove into more stocks and bonds throughout your life (bond rates are bubbilicious and insulting right now—when they become more attractive, the content of this site will change to reflect the better terms when those days arrive).

(4)    You eventually have an endgame of being a capital allocator. You work when you want to work. Meanwhile, you have several properties generating $3,000-$5,000 per month for you to deploy as you wish. You have blue-chip stocks that are deploying tens of thousands of dollars in annual dividends for you to reinvest into new opportunities that will in turn generate cash of their own. You have an emergency fund of $25,000+ so that you can handle any unexpected expenses that show up. In short, you’re a financial powerhouse.

Everything I say hinges on the successful and sustained conversion of income from your labor being converted into an ownership interest that will generate cash of its own, so that with each dollar you invest, you have more and more money coming from business ownership sources instead of from your labor.


Originally posted 2013-11-11 08:46:22.

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18 thoughts on “The Most Important Thing About Money and Investing

  1. Great article Tim!

    Nice summary conclusion: "Everything I say hinges on the successful and sustained conversion of income from your labor being converted into an ownership interest that will generate cash of its own, so that with each dollar you invest, you have more and more money coming from business ownership sources instead of from your labor."

    Bout says it all. I am still working away getting my rental real estate mortgages paid off. I'll have the first of the remaining three paid off next month. That will generate another $425.00 per month on free cash flow, converting was was formerly the payment/interest portion of the monthly loan payment into cash. Now, do I roll that into the snowball, or start compiling funds into the ROTH's? Decisions, decisions…. Either way, those 425 freed-up little guys will be put to work month in, month out.

    Thanks for continuing to put out really good content.

  2. Dividenden-Sammler says:

    You are right!

    Your amount from 82,000 USD (or more) for the yearl income is ALMOST correct 😉

    And I´m from Germany.

    You have to earn more money and spend less – every month!

    This have to be the big target!

    If you are married, part two (spend less) is very difficult… 😉

    Than you have only the chance to make MORE money.

    More money than your wife can spend at shopping 🙂

    Best regards


  3. Tampabay says:

    The BEST Article I have ever read on "why to Invest" IF you have Young, working people in your family make sure they read and understand these princlples..

    Good Job, thanks Tim

  4. Bill says:

    Greetings from Ireland Tim.. i surely cant be the only one reading your site.. if so i'll have to change that for you with some recommendations..

    Agree with the sentiments above, taking control of your spending and gaining knowledge of what options are available to you from a financial perspective will have a dramatic effect of your bottom line very quickly.

    Keep up the good work, wish i had been as clued in when i was in my 20's.. better late than never

  5. Paul N says:

    That's pretty tricky:

    Lean to conservatism but not political. Canadian. Around that pay scale, and yes would typically go to another financial site. Then go to a strip club 😉 How did you know all that? Creeper, yes you are!

    Also I would like to add that if I talk to 10 people about improving their finances even through the simplest of changes, they look at you like your speaking in another language. "Yea – I'll get to it"….

  6. Kingkang says:


    Kinda spooky how you know so much about us. LOL.

    You seem to like the Rotha IRA for tax shelter benefits. Dividend Mantra is trying to retire through non-tax shelter like a personal trading account. I'm trying to wrap my heads on which approach I should take.

  7. henry says:

    Totally agree, but don't exclude those earning a lot less than the average. Every person regardless of the amount they make, can make an effort to save. Cut out Starbucks, candy bars at the checkout, buying magazines (use the library), etc.

    Put the money saved into a DRIP where you eliminate fees and add additional money to the stock (you only need one good one, say J&J or any other mentioned), and watch it grow. If your position improves, expand into other shares, again with DRIP's or use any to the tax advantage accounts if you have sufficient money to open one.

  8. Dr N C Jongeling says:

    Don't forget your reader in Australia who is a Dutchman! Thank you very much for your articles, they are enjoyable reading.

    Dr N C Jongeling

  9. Klaas Tadema says:

    Wow, Tim, way off, I am offended at how your characterized my internet viewing sites. I NEVER look at sports sites anymore!

  10. Waterbuffalo says:

    You did your research well and know your readership. You even knew about the undressed women – how'd you guess? I could care less about sports though, I like science instead.

  11. Jon says:

    Hi Tim, I read your website and your Seeking Alpha articles as soon as they are posted, based in UK. You are a terrific writer.

    Reg, Jon

  12. Armchair Economist says:


    I like your stuff, but has it occurred to you that you are speaking against your own interests?

    One time I spent an hour in a book store, reading a little here and there out of several books, and didn't buy anything. My friend immediately told me, "you're bad for the economy."

    For each person that makes a change in their life and starts living $10K below their means, that's $10K out of the GDP. Maybe they quit smoking, that less revenue for PM. Maybe they buy store brand cereal, that's less revenue for GIS. Maybe they drink more tap water and less soda, that hurts KO.

    More abstractly, is it possible for everyone to be rich? How do we get there?

  13. Søren says:

    Hi Tim I am from Norway also often on your blog. I really love your writings! You should start to write a book, you could be the next Graham. By the way in my case it is undressed women, finance, news … just kidding.

    @Armchair Economist

    In my opinion most people will not change their life. Advertisement and human nature will take care of it. Most people life from paycheck to paycheck, from credit to credit… We are so few people that are really saving money each month that KO, GIS, MCD etc will not even feel it. And even we spend money for things that we need for a good living + luxurious things to feel good. The key is to find the right balance what you need and what not. Everybody rich = everybody poor. But what is rich ? Having $80,000 in income? Like most of us have? Compare your income with an income from India or China and you feel rich even if you have "only" $30,000 per year.

  14. Tyler says:

    Checking in from Thailand. Love your posts and advice. You've totally changed the way I view money, saving, and investing. Thanks and keep inspiring!

  15. Quyen says:

    Well said! I am living that path. With rental income enough to cover my basic expenses, I can take extra risk to boost income from the stock markets with active option trading (mainly put selling).

  16. James Kelley says:

    Tim, I read all of your articles as I find them inspiring to say the least. I have been trading stocks since the early 80’s and became a dividend buy/hold/reinvest investor since October 2014. I was blind but now I see. The snowball is growing very fast and will soon pass my pension. I keep excel spreadsheets and print at the end of each year. Such a pleasure to see the dynamic increase in income from a quarterly perspective to year over year. It is just plain old fun to watch the income grow simply and easily. Dividend investing is so easy a child can understand it. Keep up the great work!

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