Re-Earned Income

by Mr. Cheap

A while ago I read a post about only spending re-earned money. Its not a new concept, and in fact in George Samuel Clason’s classic “The Richest Man in Babylon” he talks about something similar. In it, a money lender is teaching an ambitious young boy how to become rich. He has convinced him to live below his means and invest the excess. The money lender asks him what he does with the income from the money he saves. The boy talks about the delicious foods and the fancy clothes he purchases. To which the money lender chastise him and says that he’s “eating his children” and he has to allow his wealth to compound and keep making more for him (the re-re-earnings in the originally linked to post).

Another blog post I read was about the blogger getting his first $30 / month in passive income. He was excited, but also had the feeling “its just $30 / month”. Similarly I was talking to some friends one time about my investment condo and talked about how I make around $250 / month from it and one of them apologetically said “$250 per month isn’t very much money”.

Its true, but one of the commenters on the $30 / month post said to think about it like some bill he’d never have to pay for again. Imagine he got a cell phone with free usage for the rest of his life. You’d be pretty excited about that, right? If I view my condo as paying for all my groceries for the rest of my life, $250 / month becomes pretty sweet!

Most of my long term financial plans revolve around re-earned income (as the original poster called it). Being able to have passive, reliable income that covers the various expenses in life seems to me to be the best way to get to the point where you can be confident that you’ll never be forced to work somewhere you hate for the rest of your life.

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{ 12 comments… read them below or add one }

1 Four Pillars

This sounds like the Derek Foster approach – live off the earnings.

I think is an interesting idea but more applicable to younger retirees who need to live off the money for a long time.

Someone who is older would be better served by using the 4% rule .

Mike

2 Leslie

This is the ‘make your money work for you instead of working for your money’ school of investing. I regret it took me decades before learning this but better late than never!

3 Mr. Cheap

Mike: You’re absolutely right. There’s no reason to preserve your principal if you’re in a “real retirement”

Leslie: Just think that you’re ahead of all the people your age who haven’t figured it out yet!

4 ThickenMyWallet

I always find it curious that people take a “home run” approach to investing. If people can’t clear a massive return or rental income then its just not worth doing. It seems strange to me because if you study how rich people got rich (for those who did not come from well to do families like the Trump’s) they started small and let the momentum build. At some point in the process, you hit the tipping point and the massive returns come in but it is a process.

While $250/month in rental income isn’t that much in the abstract, it is $250 more in your jean pocket then the person who thumbed their nose at that figure.

5 0xCC

I read Derek Foster’s “Stop Working” book in 2005 and changed my investing focus to income rather than capital appreciation. In 2005 my portfolio generated an average of about $150/month. By the end of this year I expect my portfolio to generate close to $750/month. Obviously I’ve been adding to my portfolio over the last 3 years but I would say that at least 30-40% of that $600/month increase has come from re-investing income and companies increasing their dividends. So far in 2008 my investment income has increased $20/month just from companies increasing their payouts to shareholders.

6 guinness416

I’m not exactly a starving artist and 250 bucks a month seems like a decent chunk of change to me. Instead of looking at it as your grocery budget you could also look at it as an additional, what, $7,000-ish of christmas bonus, which none of us would turn our noses up at.

7 moneygardener

Thicken My Wallet’s comment hits it bang on for me. Of course $30/month or even $250/month doesn’t seem like much money because many people always think in terms of employment income. The kicker with passive income is that you don’t have to actually do much to get it, that’s why it’s passive, also in the case of dividend stocks, it’s relatively permanent and grows.

8 Dan

Everyone needs to be taught Net-Present-Value calculations.

Basically, the worth of a recurring $30/month payment (assuming it is risk-free, even though it is not) is between $3600 and $7200.

$3600 = $30/mo * 12 mos * (1/10%)
$7200 = $30/mo * 12 mos * (1/5%)

In other words, someone would have to invest $3600 at a 10% return, or $7200 at a 5% return in order to get the same kind of return. (And I’m completely ignoring tax advantages & disadvantages here)

Advantages with blog income: If ad rates increase along with inflation, your returns will be inflation adjusted. Some organic growth from search engines may occur as content ages. The cost of hosting content should continue to go down.

Disadvantages: Content can go “stale”, or out-of-date, and therefore people won’t view/seek it as much. Ad rates can tumble. Some maintenance is required which probably isn’t being accounted for. New forms of media may take over.

9 Jerry

This is a common fault for many people. You don’t see success in most areas of life by going with the “home run approach” that ThickenMyWallet mentioned… rather, true success leads from multiple smaller efforts combined over time. For many people, $250/month would cover their groceries, or their health insurance, or some other necessity. I think this is why so many people will line up to spend money on lottery tickets, but won’t actually invest small, consistent amounts in their future.
Jerry

10 Dividend Growth Investor

Dan, the only problem with blogging income is that it requires your full attention to writing great content, while at the same time marketing to everyone on the web.
With investment income though, you only need to select companies that won’t cut their dividend. If you are fortunate enough that your company keeps giving you raises ( like JNJ) for 4 decades, then you are a lucky person..

11 Mr. Cheap

DGI: Yes, that’s my feeling too. The $30 I referred to in my post wasn’t from blogging (I forget where it was from, but it was passive). Blogging income is more like a second job rather than a passive income stream in my opinion.

12 Dan

Ah, I guess I should differentiate between different forms of blogging. If your blog is primarily informational in nature and depends upon search traffic rather than having a following, then it isn’t as much work (new content isn’t required all the time to keep people’s interests).

But having a following is generally less volatile than depending on what Google’s and Yahoo’s algorithms are that week.

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