To reach and feel wealthy, you need to own a sustainable income stream from passive income. That income stream needs to be enough to cover your expenses, so that you don't have to worry about money and just enjoy your life.
Unless you inherit wealth, you need to build that wealth over time by working for income, save up the excess after your expenses, then put that excess into passive investment to get a passive income stream. In other words, you get more and more wealthy by slowly converting your active income to more and more passive income.
The choice of passive investment is simple: stocks. It beats inflation over time, so you are always getting closer to the inflection point of covering your living expenses with a passive income stream, and then hopefully greatly exceeding them.
The way to build up that investment is by following the 3-to-6 50/50 strategy (pronounced "three-to-six, fifty fifty").
The idea is that you contribute your savings into four buckets:
First bucket is an emergency fund of liquid assets that can cover three to six months of your expenses. The liquid assets can be saving accounts or money market funds.
For money you need to spend within five years, maybe for a down payment for a car or a home, or college tuition fees for your kids, put the money in money market funds or certificate of deposits. If you know it will take more than 5 years to accumulate enough for a big purchase, you should consider putting them in the wealth maximizing stocks bucket.
For money you don't need for five or more years, split the money into two buckets:
50% in income producing stocks
50% in wealth maximizing stocks
The goal of the income producing stocks bucket is to generate a sustainable passive income stream that grows over time. It usually contains stocks which distribute a good portion of their income in the form of dividends, e.g. some stable companies like utilities, asset management companies, consumer stables, REITs, etc.
The wealth maximizing stocks bucket usually contains "growth" stocks which have a high chance to supercharge your wealth. Oftentimes you put some technology companies there. If you want to take a chance or you get a "tip" from someone, not that I recommend it but if you really want to, this is the bucket you can utilize. I tend to take a long-term view with good calculated risk when investing in stocks, but each person is different. For simplicity sake, you may simply invest in S&P 500 index funds, e.g. SPY.
You should never sell the 3a bucket. The income bucket is for your long-term financial independence, a perpetual wealth generation machine.
The 3b bucket can be used to fund big purchases or other ambitious goals. The selling should happen very rarely. You should generally plan ahead for the purchase, so you have time to allow for this bucket to appreciate, then when you need to make the big purchase within five years, sell enough of this bucket and put the proceeds into money market funds or certificate of deposit to wait for the moment to make the purchase.
The second bucket that uses money market funds or certificate of deposits to save for big purchases may not be necessary if your income is good enough, especially when your 3a bucket is large enough to boost your total income. Oftentimes, big purchases do not have to come at a set time, especially when they are luxury in nature. For those cases, you can simply wait for your 3b bucket to grow, and time your sales opportunistically to spoil yourself 😂 So feel free to skip the second bucket if that suits your situation.
P.S. The Tai Family Fund fits into my 3b bucket. It consists of a lot of stocks which give out high levels of dividends, mostly reflecting my area of expertise in the stock market. While this fund may be used for funding the family expenses in the future, it is not for my income purpose for now.
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