Rule #5: Purchase passive income and appreciating assets with your savings

Wealth

Jan 16

Once we’ve maximized our savings, it’s time to put it to work.

Instead of making money by exchanging our time for income, we’ll make money with our money.

There are many strategies for doing so, but the simplest are predicated on purchasing a diverse selection of stocks and bonds in proportions suitable to your risk tolerance, holding them for very long periods of time, and doing so in the accounts that minimize fees while maximizing your ongoing tax advantages.

You’ll decide whether you would like that passive income now, skewing your investments toward dividend-paying stocks, real estate income, and high yield bonds, or if you’re content to realize your income later (and primarily in the form of capital gains), in which case you’ll lean toward assets with high appreciation potential but low current payouts.

Surprisingly, which avenue you select and what you invest in matters less than the fact that you participate in investing at all.

Over long periods of time, and provided you pursue adequate diversification, returns from various risk-bearing assets types tend to converge — whether you purchase a large-cap index fund or a small-cap index fund matters relatively little compared to the fact that you purchased something.