Saturday, January 13

Income vs. Net Worth

I have decided in the past year that this is the area of personal finance that I understand the least. In the past I have always focused on building my net worth, even when I didn't call it by that name. I would work on saving, investing and paying down debt, which are basically the three pillars of building your net worth.

But at some point this past year I started thinking about retiring early and thinking about it in more practical terms. Like, do I really sell off my investments every month bit by bit to pay the bills? That seems like a recipe for high commissions, poor timing and hassle. And if not, how exactly am I going to get money each month for practical items like toilet paper and milk? I know that my spreadsheet projections show that I will be withdrawing a certain amount each year, but I don't know what the mechanics of that should actually be.

So I now have a couple of ideas that are a start. First, as I mentioned, I bought a house with a rental suite in the basement. While I have a mortgage it will help to pay that cost, and afterward it will be a source of monthly income for me. The second is that I was introduced to a company that does higher risk mortgages by bringing a group of investors to raise the money. For the investors, they are paid monthly interest income and the principal returned at the end of the term. Because the risk is higher I can't use this as a main source of income, but I think that it would be quite reasonable to invest 5-10% of my portfolio in products like this. Currently I receive approximately $150 per month on the amount that I have invested.

I now need to look for other ways to generate income for my future retirement. One option that I want to look into is dividend paying stocks. But I know that they tend to pay quite low rates so I'm not sure how viable that is, unless I consider it as a more mixed growth and income component. Another thing I want to look into is bonds. I've never really understood bonds though, so I'm quite reluctant to wade in too rashly.