Beyond Financial Independence

BeyondFI: Know Your Money: What is HOARD?

May 27, 2012 · Jay Bugg · Comments

What is HOARD?

If you are extremely lucky you learned the basics of personal finance from your parents. Maybe you were lucky enough to spend a few hours during Home Economics to learn about personal finance in school. I mostly remember the cooking. The point is, most people in America are not taught how to be good with their money. Advertisers are excellent about teaching consumers to spend their money. So armed with little training about saving, investing and delayed gratification; Americans often spend all of their take home pay and then go into debt to buy even more.

My point with all of this is simple. The idea that you can HOARD your money to create a pile of investments that can support you and your family for the rest of your life, is something we are simply not taught. So if this seems shocking to you, you know part of the reason why.

Plan A – Capital Gains

Most websites that are written to cover the topic of financial independence suggest this method. Investing is done primary with stock index funds. A low cost total stock market index fund is all you need. Once the balance of the fund is 25 times your expenses you are financially independent. At times you might dip into the original investment but ideally your hoard grows faster than your withdrawal rate. The main advantage of this plan is the simple nature of it, it is basically automatic. Downside when compared to Plan B is the higher capital gains taxes compared to the taxes on dividends.

Plan B - Dividends

This is Plan B but it is my first choice for how to create a sustainable hoard. Invest primarily in stocks, and/or mutual funds that generate cash flow greater than your expenses. The income generation will be primarily dividends and interest. Using this plan you should never draw down your original investment or paper gains thereof. You should be taxed at the lower dividend tax rate as well.

How to get there?

Regardless of which plan you pick, all you need to do is cut expenses, invest and repeat. Investing 50% of your take home pay is a good start. I know you can do it. If I can cut my expenses to reach the 50% mark you can too. If you cut everything possible then fine. How are you going to handle your next raise, or bonus check? Are you going to run out and buy something or sign up for yet another cable tv sports package? Or are you going to start building true financial independence for you and your family? 

Clearly the more you save the faster you can get to financial independence.