How to fuel your ability to invest
Why investing is overrated.
You have probably been sold that investment is the golden ticket to wealth at some point in life. If you do not invest, inflation will chip the value of your money and how compound interest favours you if you start early.
While all these claims are true, it becomes annoying when you are hearing them for the 1000000th time.
Before spending all your time and effort on learning about investment, you will first need to know the difference between Labour and Capital income and which you should focus on.
What are Labour Income and Capital Income?
Generally, there will only be two types of income you will ever receive, Labour and Capital income.
Labour income refers to the income you earn in exchange for your time and hard work. One such example would be your monthly salary.
On the other hand, capital income refers to the income you generate from the asset you own. Such examples would be rental income, dividends, etc.
Which should you focus on?
Well, it depends. To illustrate our point, let’s look at the two different scenarios.
Scenario 1
You have $1,000 spare cash and only 3 hours of free time daily. With that, you can either spend it on an online course or look for a company to invest in, which would you choose?
If you chose to focus on building your Capital Income
Let’s analyse the possible outcome of this.
Let’s create a scenario: you have done a good job at handpicking a company to invest in and it’s able to give you a return of 20% year-on-year (y-o-y) annually. Assuming you stay invested and invest all your dividends, your initial $1,000 will grow to $6,191 after 10 years! Now that you’ve seen your profit, you might be thinking “yes, I made the right choice”.
But what if you chose the former of the options above?
If you chose to increase your Labour Income instead
If you've picked the former choice which is to upskill yourself, here’s what may happen- you take on a $1,000 course to improve your skillset and you become better at your job. 2 years later, you are recognised for your capabilities and get awarded with a salary increment of $2,400 to your annual income. Assuming you don’t invest this money at all (although you probably should), after 8 years, the total profit you have earned from taking that course would be a shocking $19,200. This is more than what you would have made if you chose the alternative.
The best course of option in Scenario 1
Given only $1,000 to invest the clear winner in this situation is to focus on building your labour income.
It is only when you are capable of achieving a y-o-y return of 35% then you will be better off investing the $1,000. For most retailer investors, achieving 35% returns consistently for 10 years is definitely not an easy feat so it is definitely a safer bet to focus on your labour income.
Scenario 2
Now assume that instead of only having $1,000, you have $100,000 and you are faced with the same dilemma of whether touse it all to upskill yourself or invest all of it. If you were to invest it all, it will compound to $619,173 given a consistent return of 20% y-o-y. On the other hand, it wouldn’t make sense to invest the full $100,000 to upskill yourself for better employment- it just doesn’t work that way.
What you should focus on?
When your capital is low, your focus should be on investing in yourself to increase your earning capability.
Our earning capability directly affects our capacity to invest. At the start of our career, is where we have the most potential to grow our income. But it is also when we do not have a lot of capital to grow our wealth. With that said, if you are at the early stages of your career, we believe that you should focus on building your earning capability and once you have accumulated enough capital you can shift your focus on building your capital income.
With Low Capital, should you not invest?
The short answer is no, you should still invest. If you feel like this article is non-conclusive, I’m suggesting that your focus and priority should be on building your labour income whilst keeping a stream of capital income when you have little capital. In fact, there are many advantages to invest while your net worth is little, more on that next time.
Here are some of the options you can consider doing when your capital is low:
- Dollar-Cost-Averaging( DCA) into an exchange-traded fund
- DCA Roboadvisor
- Mutual Fund.
- Stocks with a long-term investment horizon
The key idea here is, you pick an investment class that only requires your time and effort for the first purchase. Personally, I picked Roboadvisor to help me with my capital income while I build on my Labour income.
To read about how I started my investment journey with $100, do check out this article:
Conclusion
We are often sold on the idea of building capital income to start our passive income stream so that one day, we can retire early and live off the money our money grows for us. However, we need to take a reality check on ourselves and understand that while it is possible to build multiple income streams from our capital, it is not realistic for most of us at the start of our careers.
Ultimately, like what Warren Buffet said, the best investment is in yourself.
