Question: What are the consequences of spending the passive income versus compounding it?Reply: It is admirable that you are talking about spending passive income! That only means that you have been investing your savings. Investing your savings is the best way to increase your wealth provided that you choose the right investment options.
As you know, you can choose to spend the income that you earn from your investments. This follows the principle: Use your active (earned from your sweat and actual time spent) income for your needs. For your wants, use only your passive income. You let your money work for you and you are entitled to spend it, if you want to. However, if you reinvest all or even only part of your passive income, you will get to your wealth goal faster.
Reinvesting your passive income is “compounding” ,i.e., You do not touch the passive income and just keep on reinvesting it. Therefore, your money works for you and the income that your money earned again works for you to earn you move passive income and so on and so forth. Compounding is exponential…meaning the increase in income is very rapid.
It is easier to allow the compounding of your passive income when you choose an investment option that will automatically do it for you. If you have to make a decision to re-invest the passive income each time you receive it, you will be tempted to spend it or you might not know where to invest it again or you might just forget to re-invest because you are so busy.
If you spend your passive income as you receive it, that is the end of the income. It will no longer grow. It becomes even more of a pity if you spend the passive income in a “want” that is not truly so important to you. Just make sure that you really enjoy whatever it is so that it is not wasted.
This is also one of the reasons why I also like mutual funds for investment. When you invest in a well-managed mutual fund and leave your money there, it automatically compounds it for you.
In addition, there are the Variable Universal Life Insurance plans that are available to cover your Health, Investment and Protection. Learn more about it. Write info@colaycofoundation.com
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Francisco J. Colayco is an entrepreneur, a venture developer and financial advisor. He is the Author of Seven Bestsellers in the Pera Palaguin Series, the latest of which is now available in bookstores: “Wealth Reached. Money Worked. Pera Mo, Pinalago Mo!” Find his works and catch him on TV and radio. Check out: www.colaycofinancialeducation.com, www.franciscocolayco.com, www.kskcoop.com, FaceBook and Instagram.
