Tuesday, March 4, 2008

Turning a Golden Egg into a Golden Goose

Have you ever dreamed of managing a large sum of money? I am sure many of you would like to give it a try. How tough can it be to manage Paris Hilton’s fortune? Bill Gates’ billions? Most people trivialize such situations probably because they have never seriously considered themselves in such a position. Dreaming about winning the lottery rarely includes dreaming about the financial management side of the story.

I got a sense of the anxiety that can accompany such responsibility when I first hit a big financial milestone. Even though I had been slowly accumulating this money and watching it grow for quite some time, once the amount hit six figures, I started to feel uneasy over managing a sum of this magnitude. Somehow, when it was a lesser amount say $70,000 or even $95,000 it was not an issue, but once it climbed over $100,000 dollars, the panic switch flipped and all of sudden I realized that I had more money than I had ever had.

My plan was working perfectly as I had accumulated a nice nest egg to provide substantial financial security. That was the main goal.

But this money was destined for more than just security it was to be the seed for growing my future early retirement income. It was very important that I invest it wisely. Of course, I had been doing that all along, but for some reason hitting that amount triggered some hesitation. I began questioning whether I possessed the expertise to invest so much money. Most of the people I knew at the time that had anywhere near that much cash also had financial planners. Did I need one now?

I have never employed a financial professional to manage my funds. I have never hired an accountant or CPA, rather I prefer to calculate my own taxes even though they have grown increasingly more complex. I am definitely a DIY’er. And I wanted to remain that way. I had to find a way to get over this new perceived fear that might cause me to freeze up when making financial decisions.

The first thing I did was to organize my accounts so that it was easier to focus on the percentages and not the dollar amounts.

Then, to get everything into perspective; I determined the potential passive income that this lump sum could generate. After all, that huge lump sum really didn’t matter, because it wasn’t going anywhere. In fact, I may never spend that money. What does matter is the amount of money generated by the lump, also known as passive income.

That passive income will one day become my primary source of income in retirement. Looking at it that way, I realized that $100,000 really wasn’t that much money at all. Invested at a conservative rate such as 6%, it would only produce $6,000 a year before tax. I still had a long ways to go and this first $100,000 was just the beginning in my financial future.

This was an important step. I had transitioned from seeing the money from a viewpoint of what it could buy me right now to what it could generate for me in the future. Some see money as a tool to buy things and never reach this next level where money becomes a different kind of tool. Money can become a tool that keeps on giving. It’s no longer the golden egg, but the golden goose.

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