5. Investing Profits

5. Investing Profits

We learned about the Monthly Cashflow Analysis in the previous lesson, which revolves around this straightforward equation.

Total Income - Total Expense = Profit

We've already covered how to increase income and decrease expenses to maximise profit. After setting aside the monthly free-spending budget, this lesson will teach you how to invest the profit's investment portion.

This entire Guide: Managing Personal Finances For Life teaches the most fundamental knowledge and tips a honey badger should follow for financial success. It doesn't teach you how to invest and gamble on highly speculative investments. I recommend you stay away from other types of investing until all of the portfolios mentioned here are constructed and maintained well.

1. Find what tax-efficient investing accounts your government offers

Most developed countries offer some tax-efficient accounts you can open to make your investments. Any capital gains or dividend earnings within this account will not be taxed. Much like how you opened up your bank account with a bank, you can open this account with a mobile app that is a broker. Here are some examples:

All of these special accounts are called differently in each country. Important! You want to find a place where you can open these accounts to buy ETFs from stock exchanges specifically. If you are not sure, ask the broker's customer support if you can buy ETFs and Stocks from the account you are about to open.

Once you have opened such an account, go ahead and start transferring money into them from your regular bank accounts up to the limit specified by your government.

2. Buy ETFs or Income Funds periodically and NEVER sell

Set a scheduled money contribution into your investing account and buy the ETFs of your choice as soon as the money arrives. If you are a complete beginner, you can think of an ETF as just a basket of company stocks based on specific rules. For example, there could be an ETF of top energy companies that consists of various oil company stocks. The rules of this ETF will dictate how the "top" companies are selected and how often the basket is updated since different companies will come and go out of this basket.

I like the classification of the ETFs into two types: growth vs dividend.

  • A growth ETF is a basket of companies that do not pay out regularly scheduled dividends. These companies choose to reinvest the capital back into their business again for faster growth. (ex. Tesla)
  • A dividend ETF is a basket of companies that regularly schedule dividends. Since there can be thousands of stocks in the ETF, the maintainers of the ETF typically consolidate all the dividend payments to pay out to you once every three months.

The growth ETFs will almost consistently outperform the dividend and earn you more money. However, you only realise the capital gains when you sell the ETF and receive cash in your investing account. This deferred realisation makes it impossible to incorporate them into our Monthly Cashflow Analysis as an additional income stream.

Simply put, the choice between the growth ETF vs the dividend ETF comes down to making more money but receiving the cash when you are much older or making less money in total but experience getting richer every step. I've chosen the dividend ETFs because I want to see my monthly free-spending budget grow, which makes me feel I am getting wealthier and keeps me motivated to continue investing. You can also invest in a combination of the two.

I live in the UK and buy my ETFs from the London Stock Exchange (LSE). Here are the four dividends ETFs that focus on different baskets of stocks, and they collectively allow me to invest in thousands of high dividend-paying companies globally. Please read their linked ETF description pages before purchasing them if you are interested.

It's worth noting that you can reinvest any dividend payouts right away to buy more of the same ETFs. In most investing mobile apps, you can set DRIP on your account to have the reinvesting done automatically for you. Setting this up is tremendously beneficial because it will guarantee compounded growth to your investing account.

Suppose you are like me, who takes an extreme stance on favouring the regular cash flow income over capital gains. In that case, you can also include actively managed funds that are entirely focused on monthly income payouts. I have the below two funds in my portfolio.

The above funds are eligible to be invested with your ISA accounts in the UK.

3. Periodically rebalancing the ETFs

Many studies show rebalancing your portfolio results in more gains in the long term. You can learn more about how to do rebalancing from here. I rebalance across the above mentioned four ETFs once a month. You could argue that there are better timing strategies to rebalance, but this level of micro optimisation makes little difference and is still reliant on luck at the end of the day. It is better to keep it simple, stay consistent and direct your energy and time on your other business ventures that generate substantially more income.

There you have it. This post marks the end of the Guide: Managing Personal Finances For Life, which is the must-follow baby steps that everyone in the HBT community should take. You should invest all other more advanced investment strategies considered high-risk-high-reward with the money left over after making the regular contributions to your tax-efficient investing accounts. In about 15 years, the compounded growth of the ETFs and the dividend payout will eventually become large enough to earn more than your full-time career. It truly becomes a passive money printing machine.

← 4. Decreasing Expense