Growth vs Income – What is best for you?

When it comes to building your wealth and financial freedom, growth and income are two of the most important components of the equation.

Now this isn’t going to be a maths lesson… who wants to let maths get in the way of making money, right?

Instead, this week I want to highlight the importance of both growth and income to assist you to decide what you want…

That is, if you have to decide!!!

What Are Growth and Income?

Let’s keep this as simple as we can…

As you already know, the amount of money you make in any investment is related to the risk involved. The more risk, the greater the expected return.

And the return you make on investments comes in two forms, either capital growth or income (cash flow).

Capital growth is simply where the investment is worth more after a period of time than when you bought it.

Take your family home for example. If you bought any time in the last twenty years, you will know that your property is now worth more today than it was when you bought it…

That’s capital growth.

cash flowIncome on the other hand is cash paid to you from your investment on an ongoing basis.

This could be in the form of dividends on stocks, rent on an investment property or interest on cash investments such as term deposits or bonds..

Now here is the tricky part, while you want both, they are different and serve completely different purposes when creating your financial freedom and living off your wealth.

The Stages of Wealth Generation

Before you make any rash decisions about whether you want to be chasing income or growth, it is important to understand where you are at in your wealth journey.

I like to suggest that there are two main stages in the journey.

First is the building phase…

This is where you are just starting out and working toward financial freedom.

The building phase is about accumulating quality assets with all your available investing dollars.

In the building phase, there are two priorities. First, you want to be eliminating all consumer debt, those pesky credit and store cards and any non-investment debt.

The second priority is to be accumulating quality investment assets.

In this phase, income is less important to you as you are likely still working and earning a wage to meet your living expenses.

And if you follow my guidance on living below your means, you will be well placed to invest your surplus each month.

The second phase comes after the first, makes sense I guess, and it is when you have achieved a level of financial success and you want to start using your wealth, your investment assets, to fund your living expenses.

When to use Growth

Now that you know the stages of building your wealth, you probably want to know what type of investments to use in each…

And for some of you it might be obvious. But here is the trick, the answer is a little more complex, and this tends to be where you might think it’s all too hard. Not anymore, ok?

growthWhen you are in the build phase of your investing, especially when you first start out, you want to be accumulating a majority of growth assets…

And here is why!

Generally, growth assets provide less income, but they grow in value more quickly. This growth in value means you have a better opportunity to build more assets and the process becomes almost self-fulfilling.

The other significant factor to consider is tax. In most countries, the gain made from growth on an investment is not taxed until the asset is sold. Since you are never going to sell these assets, you won’t have to pay tax on the growth.

Tax is the enemy of wealth accumulation. If you have to take money out of investments for tax, the power of compounding is dramatically reduced.

Now this isn’t going to be a tax lesson, but for now just appreciate that a key benefit of growth assets is the ability to delay the payment of tax.

When to use Income

When you move into the second phase of wealth, you may decide you no longer want to work, or you may have reached retirement age.

At this point the regular wage stops coming in each week, ouch!

So to meet your living expenses, you are going to need something else to provide the cash flow you need…

Let’s have the understanding now, that any government pension that may or may not be available by the time you reach this phase isn’t going to be enough to keep you in the lifestyle that you have become accustomed.

So you turn your attention to income generating assets.

With income generating assets there is a regular cash flow that you can use to meet your living expenses.

At this stage of your wealth journey, growth is less important, because if you have been successful in phase one, you will have a substantial portfolio of assets that are still growing in value, and may even be providing substantial income as well.

Coming back to tax, now that you don’t have a wage coming in, your tax circumstances will have changed and therefore it is likely that the contribution you make by paying tax will not have the same impact it would have in the building phase.

But I Want Both…

Ahhh, you noticed I said what if you don’t have to decide earlier…

So here is another thought to ponder. What if there was a way to speed up the journey to financial freedom.

As you may have noticed, growth assets tend not to provide a lot of cash flow, and you can’t pay your living expenses with growth, right!

So, during the building phase, it is prudent to accumulate a combination of both growth and income assets. The mix is no special formula; it really does come down to your personal circumstances…

comfortable womanBut the key, the secret if you like, is that by accumulating both, you actually hasten the time it takes to achieve financial freedom.

If you recall, the definition of financial freedom is when the income from your investments exceeds your living expenses.

If you are accumulating both income and growth assets, and the income assets are starting to help you meet your living expenses, you won’t need as much of your wage to meet your living expenses.

As your assets accumulate, more and more of the income from the assets will meet your living expenses and before you know it, you will be financially free. Boom!

So what are you waiting for, the sooner you start investing the sooner you can be sitting on that poolside lounge, drinking the cocktail and enjoying the warmth of the sun and the smell of the air.

If you are interested in a FREE coaching session, click here to book a time with me for a 45 minute call where we can identify what you want and how we can make it happen. The link is to my personal calendar, spots will fill fast, so act quickly.