Why am I Investing?
I can remember long ago, when I first became interested in investing, considering the question, 'What am I investing for?'
Most people's answer to that question would be to make money. I admit, this was my first answer, too. However, I wanted to come up with a plan that was going to do more than just make me money, but I didn't know what that plan was yet. It took some thinking, but I did come up with a plan that, I thought, made some sense.
I read the book 'Rich Dad, Poor Dad' by Robert Kiyosaki like I have read very few books in my life. I will start off by saying that I hate reading, and prefer to listen to audio books instead. However, there was something about this book that lit me up in a way I hadn't been in a long time. It gave me ideas about investing, in general, that I thought I could find useful if I put them in place in my own life.
For those of you who are not familiar with the book, I will very briefly summarize the basic premise. The rich purchase assets that provide income. The poor (and to a lesser extent, the middle class) purchase liabilities that cost money (sometimes thinking they are assets). So, if you want to be rich, you have to buy assets.
So, if I buy a car, I have bought a liability, not an asset. I still have to pay to use it (fuel). I still have to pay to maintain it (repairs). I still have to pay for the privilege of using it (license and registration). The car may have a value, which causes people to think it is an asset, but it is a liability because it costs additional money every year.
So, what is an asset in Robert's world? He focuses on businesses and real estate, but anything that provides you with an income is an asset in the Rich Dad, Poor Dad world.
Warren Buffet is considered the 'Worlds Greatest Investor.' His company, Berkshire Hathaway, is an investment holding company. He uses his money to purchase businesses, either in part or wholly owned, and then lets those businesses generate income to invest in other businesses. Geico, the insurance company, is a Berkshire Hathaway company. Fruit of the Loom, Dairy Queen, Heinz, and the Pampered Chef are other companies Berkshire Hathaway wholly owns.
Warren teaches to buy what you know. If you like a product, if you can figure out how they make money, and if it is affordable, you buy into it. Now, Mr. Buffet can buy the whole company with the amount of money he has available. For the rest of us, we have to buy individual shares of stock.
Enter 'The Plan'...
So, Robert is telling me to buy assets. Warren is telling me to buy what I know. And I want to invest with some sort of plan in mind. So, what is the plan? My plan, and whether I have achieved this today or not is not relevant for this discussion, is to purchase assets in companies I know...so that they will pay my bills for me.
So what do I know? I know that every month, I have to pay for electricity. I send a check every month for the electricity to use my computer (and, thankfully, write this article) and I will be doing that for as long as I still have to get electricity to my home. So, what happens if I start to buy the stock, wait for them to pay me dividends, and let THEM pay my electric bill for me?
The answer: I live with free electricity for the rest of my life.
So, for simple numbers, let's just say I pay $100/month in electricity (it changes every month, and it would be better to have the annual number, but lets just keep it simple). That is $1200/year in electricity. I have the name of my electric company, so I begin to do the research. Is the electric company publicly traded? Yes. Does the company pay dividends (monthly/quarterly/annually)? Yes. That is a win. If I buy enough stock in the company, they will pay me a dividend, and that dividend will pay their bill. My electric company is now paying my bill for me. My electric company pays $1.24/share/year, so if I can purchase 1000 shares, I am finished paying for electricity (and I get to keep $40/year!).
Now, I look at all of my other recurring expenses. Can my cell phone bill get paid every month? My cable bill? What about my gasoline or my car payment?
If I research these companies, one at a time, and focus on eliminating that bill from my monthly expenses, I can add the extra money to my next investment. After all, since I have already eliminated my electric bill, I have an extra $1200 to invest in my cell phone company every year. Once my cell phone bill is paid every month, I have even more money to eliminate my cable bill.
Now, I am Living for Free
Now that I own the companies that service my needs, I can let them do all of the work and spend my time doing things more enjoyable. Maybe I'll go buy a few hundred shares of Disney and take that vacation next year? Maybe I'll buy shares in Harley Davidson and let them send my my motorcycle payment every year and go for a ride across the country.
The key here is I have purchased assets in companies that I know that are paying me the money I would normally pay to them. Now, this option is not inexpensive and it does take money. For example, at today's price, I need to pay almost $36,000 to buy enough shares in my electric company to get 'free electricity'. Frankly, I don't have $36,000 sitting around right now, but that is why this is a plan. You don't get there overnight (unless YOU have $36,000 sitting around doing nothing), and the $36000 will only eliminate one bill. I still have other bills to pay, and it might take more or less money to pay them.
The key here is moving in the direction that will get you where you want to be. Find a single bill, a small one, and focus on getting it paid every month. Find the company, begin to buy the stock, and let the dividends help buy more shares of the stock until you are ready to collect those dividends. The key to the plan is to begin...