Friday, March 16, 2012

How to Get Rich - Get Paid As Often as You Can

When you work for an employer, how often do you get paid ?

Most of us would say every two weeks. Some would say twice per month. Which of these two payment options would be the best for you ?

Yes, once every two weeks is better. This is because you have your money sooner and can spend it on whatever you need to or want to much sooner. If you have a regular savings plan you would be depositing funds more often (two more deposit per year actually) which will grow your savings at a faster rate.

Why Does This Matter

The same principle should be used when choosing your income investments. Given two equal quality investments, choose the one that pays out income more frequently. As long as this income is reinvested right away, you will make more money in the long term. This is called compounding and the more often your money is paid out and reinvested the better.

To illustrate this, go to the tools page on this site and type in a savings plan. Now, change the frequency of the compounding and see what happens. The longer the savings term you select the more difference the compounding frequency makes. It really is magic.

There are many investments that pay out a regular income. The most common payment frequencies are once per year, once every three months  (or quarterly), and once per month. I prefer to find investments that pay income monthly. There are a couple of additional reasons (other than the power of compounding) why this is a good idea.

Other Good Reasons

One of the most rewarding principles of investing is to watch your money grow. By seeing the monthly income  flowing into your account every month gives a visual representation and a very positive feeling about your investment. If you have to wait for three months or even a year to see the income, the feeling is just not the same.

The other reason is that you will have more flexibility with your investment decisions.

Let's say something goes wrong with one of you investments and you wish to sell. Because you are investing mostly for income, you will want to make sure you get paid before you sell your shares. If you are being paid monthly, you will already have more of the income in your pocket so to speak. You don't have to worry so much about loosing the income as it will only be for a maximum of one month.

In contrast, with an investment that pays out once per quarter, you could lose up to three months of income.This could be quite damaging to your income flow and would be a bigger setback to your future wealth building.

One More Good Reason

Having your income paid monthly will also give you more opportunities to take advantage of good buying opportunities This could be for additional shares in your existing investments or other new investments that happen to be at a good price to buy.

In general, the more often you have cash to work with the more often you will be able to make investment decisions.

As you can see, there are many good reasons to getting paid as often as you can.

As always, I welcome your comments and suggestions for future topics.

1 comment:

Wealth Tips said...

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