29 December 2010

Income To Make You Rich Pt 2

In pt 1 of this series, I spoke in detail about the different kinds of income there are and highlighted the fact that earned income i.e. The income that 95% of us work for by staying at a job, getting promoted etc, is flawed and extremely slow for a number of different reasons. I also touched on the different types of income there are and gave an explanation of each, for those who are inspired to take action to also reach their own yell0brickrd.Read more about it here.

I mentioned that in the middle of all three different types lies portfolio income which is generally derived from stock [buying an interest in a company]. Many investors, one of which is Warren Buffet [Worth $47bn], utilize this kind of income to become fabulously wealthy, although Warren also owns a business which really drives his wealth through the roof.
In this post, I will be exploring in greater detail what I have discovered in terms of some of the vehicles that are utilized when one is working for portfolio income


An ETF is a fancy name which stands for Exchange Traded Fund. These are money vehicles, if you like, which keep an eye on different sectors of the stock market. So for example, there are ETF’s that solely track oil companies, mining companies, pharmaceutical companies etc. They are great for those who want to spread their money across a variety of different companies in one particular group and, as a consequence, lower their risk.

Index Trackers

An Index tracker is designed to track the stock market as a whole as opposed to different sections of it. Again, this is the kind of plan that is great for someone who wants to buy a small amount each month and either receive their dividends every quarter or reinvest it, It’s a slow but sure plan, yet it is also a secure or, depending on how it is utilized, comfortable one.

A Pension Plan For Security, Not Wealth

In A Financial Plan For Security, I discussed how a contribution to a pension plan should be something that an individual looks at, if they work for a company that provides it and would match their contributions in order to have a solid foundation. With that being said, in most instances, the money invested in a pension plan goes straight into the stock market. Whilst there isn’t anything particularly wrong with that, you certainly are not in control of whether your investment goes up or down. An excellent book which explains all of this stuff in greater detail is ‘Motley Fool UK Investment Guide’. This book is very very good for giving you a much greater working knowledge of the world of finance and it is written in very simple to understand English.

Once I cottoned on to the meaning of all the stuff I’m talking about and what it can do for me, I realized that this money will slowly begin to provide me with repeated income depending on how I utilized it. Slowly but surely, this would be taking me away from the earned income source, a source which I used to think was the only thing that existed!

One way I will be utilizing these

ETF’s are great for those who want to get in the game but don’t want to take on a massive amount of risk by trying to pick stocks themselves. Even though these will not be a core part of the rich plan, they are still excellent. [UK] There is a particular ETF I am now throwing little bits of money in each month, which basically tracks the highest dividend paying companies in the FTSE All share Index [The place where all companies who qualify sell their shares]. This is a fantastic option for one simple reason. Regardless of whether stock prices fluctuate violently or not, it doesn’t mean a single thing, because that dividend cheque will still come through my letterbox every 3 months. 

One problem with this method however is that the index can sometimes be heavily weighted toward one particular area. For example, there may be a large amount of banking companies compared to technology companies. For that reason I will modify my plan as time passes by simply maximizing the full amount that is allowed to be kept in an ISA each year. Once I receive my interest, I will target the highest dividend payer and buy all the shares I can with my saved money. Again, this may take slightly longer but the returns may very well be more favorable.

So in a simplified manner of speaking, these are some of the vehicles that can be utilized to create higher quality income from a source other than working at a job. Please feel free to post any comments below! 

This whole series is part 1, part 2 and part 3


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