During a Skype appointment this week with a lovely German lady living in the US, we discussed building long term passive income streams for true financial independence. We came to the agreement that to help build passive income is very much like the gestation period from a seedling to a fruit tree. You plant the seed in fertile soil, give it enough water, sunlight and help protect it from the pests. As it slowly grows with your careful eye watching over, getting bigger and bigger each year, and roots growing deeper and deeper into the earth for more strength and security, you eventually start to see some young fruits appear….apples.
Initially you want to pick the apples and eat them, and you could easily do this. However in picking the fruit too early, it may not be enough to fill your stomach and still leave you feeling hungry and the tree may suffer in it’s continues growth with the damage done to it by picking it’s fruit too early. Alternatively, you can wait a little longer, continue caring and watching over your apple tree, until you see more than enough fruit, so much even that the fruit is naturally dropping off the tree itself as they are perfectly ripe. Giving you more than enough apples, which you can eat fresh or cook into a delicious warm apple pie to share with all the people that you love. And now that the tree is big enough, it can continue to provide enough apples for all, year after year.
When you allow your passive income to be reinvested back into your investment portfolio, this has a similar effect. You are forgoing “eating” your dividends, interest or rental income, to give it a greater opportunity for success in the future. And that greater success is more apples, or more passive income.
To set this reinvestment strategy is really easy, if it is shares in your investment portfolio, you can enrol in an automatic dividend reinvestment plan through the share registry, or you manually buy more shares every time a dividend is paid into your bank account. If it is property that you own, you can use the rent to either pay down the loan or save up to buy another investment property. Or if it is cash savings, you simply let the interest be deposited into your savings account where it can continue to compound.
So when you are next thinking about your passive income goals, working out how to grow them to create more financial freedom, think about the idea of growing big juicy healthy apples, even if it means being a little bit hungry in the short term, it will definitely be worth it as you enjoy your apple pie later on.