My ultimate investment aim is to be able to support myself in retirement. That means building passive income streams that can provide me with cash I don’t have to work for.
I’m not in a tearing hurry to retire early. But it would be nice to be a bit more comfortable when I get there and maybe take a couple of years off before I reach my 66th birthday.
I therefore need to be thinking now about how to generate passive income. And I have a plan for how to get there.
Step 1: Save
The first step involves saving as much money as I can as early as I can. The more I put aside today, the more time I can buy myself in retirement.
If I save 10% of my salary, it’ll take me nine years to buy a year of retirement at my current income. Saving 25% means I get one year of retirement every three years of saving.
Unfortunately, it’s not so straightforward – the value of the cash I save today will be lower when I reach retirement due to inflation. That’s where step two comes in.
Step 2: Learn
In order to maintain the value of my savings and increase them over time. I’ll need to invest. But it’s important that I only invest in companies I’ve researched thoroughly.
If I invest in the wrong places, I’m in danger of not protecting the value of the money I invest. Worse yet, the value of my savings might decrease.
Warren Buffett says that the best investment I can make is in myself. Accordingly, the second part of my plan involves learning as much as I can about investment opportunities.
Step 3: Invest
Once I’ve figured out the stocks I’d like to buy, it’s time for me to get investing. There are a couple of ways I can go about this step.
The first involves buying dividend stocks from the outset. This approach would generate passive income from the outset, which I could reinvest in order to grow my investment.
Alternatively, I could start with shares in companies that retain earnings and reinvest them internally. I could try to increase my wealth like this before buying dividend stocks later.
Step 4: Repeat
The last part of the plan involves putting as much into the first three steps as I can on an ongoing basis. Continuing to save, continuing to learn, and continuing to invest.
Following the steps of the plan again and again should allow me to build a bigger portfolio by compounding my returns. It should also help me become a better investor, and ultimately boost my returns.
Exactly where I end up depends on a number of factors that are out of my control. But repeating the first three steps gives me the best chance to set myself up for retirement.
