The Value of Investment Income: Part I

Six in one hand, half dozen the other

If I were to offer you the option of owning either:

  1. an investment designed to grow in value over the course of 30 years, OR
  2. an investment designed to pay you monthly income over those same 30 years…

What would you choose?

Of course, to decide you would need to know more. You’d want to know all the specifics and variables affecting each investment.  What are the risks of each?  What are the different tax treatments?  For now, we’ll set all those aside for simplicity. We’ll assume that, pre-tax, both of these investments are the same in all was except for:

  • one increases in value by $500,000 over the course of 30 years, in today’s dollars.
  • one pays $500,000 in total income over 30 years and keeps its value in today’s dollars.

So, which will it be?

Arm wrestling over money

Which one suits you best?

Why do we care?  It is the same amount of money.

We pose this question for a number of important reasons. Most importantly, it can affect how you live. For that reason, it isn’t asked often enough. Typical savings plans often ignore the benefits of extra income from a passive investment.  Passive income is usually left out of wealth accumulation strategies. Speculation and growth are the typical recommendations for early decades of saving. Income-producing investments get ignored until the later years of distribution (retirement) are upon you.

It’s also important to remember the key principal of investing. Time value of money is a real thing. Dollar for dollar, your money will be worth less in the future. More dollars will be required for fewer goods and services. Having some of it now (or having some of it every year) means at least some of it is worth more when you get it. In that way, these two investment strategies are very different.

What if you received investment income during all those years?  

What could you do with an extra $16,666.67 in income each year? In the next article we look at some creative uses for extra income. But for now let’s consider the use that probably came to your mind first – Spend it!

Let’s see how these methods affect buying power differently. Remember that with either method, you gain the same ammount, just in a different way.

With a given regular rate of inflation, the dollars you spend now will get you more than they will in 30 years.  $16K will get you much more now than it will 30 years into the future, so having it to spend now might not be so bad after all.  

How would you spend an extra $16,667 each year?

You could splurge and take three kickass vacations.  You could take a few big roadtrips with the family. You could take a sabbatical, or go abroad for a year of extended travel. Check out the book Vagabonding: An Uncommon Guide to the Art of Long-Term World Travel, for more on extended travel. 

Woman jumping into clear blue water in a bikini

No, really, what would you do?

Travel isn’t your thing? You could eat out more often, give money to charity, or lease a fancy car. You could go all in trying a new sport or pick up that hobby you’ve always dreamed about starting.  Collect models and action figures if that’s your thing.

You could use that income to support yourself while you start a new business. Or just focus less on making money immediately, and work on business-building for the long term. You could even write that book you’ve been putting off.

Sometimes, spending is an investment in yourself

Spending gets a bad rap, and it shouldn’t always. Some types of spending are wasteful, but some spending can add huge value to your life. Investing in yourself or your business can bring great return on investment. It doesn’t have to be stocks and bonds. You’re a great investment vehicle, you just have to believe it.

Saving the talk of other investment vehicles for Part II, we’ll stop there.  Stay tuned!

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