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**Disclaimer: This is not investing advice. This is an educational rundown of parts of my investment strategy. Always consult a financial professional.**
I’m happy to announce that this series was listed as a finalist for the 2022 Plutus awards!
I first heard the idea of the perpetual money machine on ChooseFI. Your money machine can be built in different ways or using different income streams. A common quote is that the average millionaire has seven income streams. The main point is that your money machine creates enough income to cover your expenses and creates financial freedom.
When I started to save for retirement on a low income, I didn’t realize I was creating a mini money machine in the future when I wouldn’t be able to cover basic expenses. I thought I was just trying to fund my retirement for the future. But this unintended consequence helped me continue retirement contributions without saving much-needed income.
What Is a Money Machine?
A money machine is just a way of saying income-producing assets. When your assets produce enough income to cover your expenses and luxuries, your money machine funds your retirement lifestyle. There are several ways to build a money machine.
Two of the most common ways in the personal finance space are investing and real estate. Many combine these two machines. I won’t get into details on the real estate money machine because there are way better resources out there. Check out the Bigger Pockets Forum or Money Honey Rachel for creating a real estate money machine
Why You Need a Money Machine For Retirement
Do you know a friend or family member who is retired and living on social security income? Do you have money invested for retirement? In 2022 with rising inflation, social security income may not be enough to live off alone. Many living off social security before 2022, before record high inflation, were already struggling to cover basic expenses in retirement.
By starting a money machine as early as possible before retirement, compound growth has time to increase exponentially. Smaller contributions grow larger over time, whereas larger contributions may not have as much time to catch up. Starting a money machine earlier, even on a lower income, can compound to create a full financial freedom fund over time.
Coasting Off Your Money Machine
Stephonee of Poorerthanyou.com used her money machine to save over $100,000 by age 32. Thanks to investing early, Stephonee is at or near what is called CoastFI. CoastFI is when you have enough invested in your money machine that compound growth will fund your retirement around the traditional retirement age of 65 or so.
What You Need For Your Money Machine
All you need for your money machine is your money to make money. Although real estate may be the fastest way to financial freedom, I believe investing is the easiest. Through investing, I created a money machine that produces income, even when I’m not able to contribute much. Aside from contributions I use two other tools. A cashback credit card and a retirement account.
How I Created My Money Machine
I use my Roth IRA as part of my money machine for tax purposes. Since cashback rewards are tax-free, I can get tax-free contributions and growth. When I withdraw money from my Roth IRA money machine in retirement, it won’t be taxed.
This post is not sponsored and receives no compensation for mentioning Fidelity. Having an account with Fidelity allows me to save a step in my money machine process.
How My Money Machine Works With Almost No Income
This step works with having my credit card and a retirement account with Fidelity. The rewards are automatically deposited in my Roth IRA. I still have to manually invest the rewards when they automatically appear in my account. Even if I don’t make other contributions, as long as I pay my credit card off my retirement gets funded.
You can still use any cashback rewards credit card and retirement account but requires an extra step. Just transfer your cashback rewards into your retirement account. Don’t forget to invest the rewards in your funds of choice when the transfer from your card issuing bank has been deposited to your retirement account.
The Wheels of My Money Machine
More shares equal higher payouts. Higher payouts equal more shares. This cycle increases the amount of money you can pull from your money machine in the future. In retirement, I will stop reinvesting dividends and withdraw that money. Since it’s in a Roth IRA, the withdrawal will be tax-free. If my portfolio is large enough, I won’t need to sell shares and will be able to cover expenses with just dividend income.
This is just one of several investing strategies. I choose to combine two types of investing, broad-based index funds & dividends. Index funds are a type of fund that follows a specific index. Dividends are a payout from a company to shareholders for owning their stock. Another dividend strategy is to find stocks that pay out monthly, rather than quarterly, and invest in stocks so that the dividends create a monthly cash flow.
When I started learning more about dividends I came across Dividend Aristocrats. These are the companies that have increased their dividend base every year for the last 25 consecutive years. These companies are also part of the Standard & Poor’s 500 index. The top 500 large companies in the US exchanges.
Fidelity has a low-fee Dividend Aristocrat Exchange Traded Fund (ETF). Since I prefer to invest in index funds, thanks to lower fees, I chose to take my cashback rewards and invest in NOBL, which is the S&P 500 Dividend Aristocrat ETF. You could invest in a different index fund or dividend fund. There are several other dividend funds and index funds that pay higher dividends or are more dividend-focused.
My 2% cashback rewards deposits about $45 into my account every 90 days. NOBL pays out roughly $3.50, in my portfolio, every 90 days. I have about $50 extra reinvested every 90 days. That doesn’t seem like much on a portfolio of about $3,000, but those reinvestments continue to buy more shares. NOBL has a dividend yield of 1.83% Which means that the yearly dividend payout divided by share price is 1.83%
To Reinvest or Not Reinvest?
I choose to reinvest the dividends. This means when dividends in the fund payout, the money goes back to buy more shares of NOBL. If you want to buy more shares of the same fund reinvest dividends. If you want to manually reinvest the payouts don’t reinvest dividends.
Why keep buying NOBL? Why not the monthly cash flow strategy? Why not search for distributions over 7% to try to beat the average stock market return? Simplicity. Check to see if my cash back rewards come in, and invest it all in NOBL. Dividends reinvest. Repeat. Simple, easy, effective. Sticks to my philosophy of broad-based index fund investing and being a bit more strategic.
Wrapping It Up
Creating a money machine through investing is simple. You can create extra contributions through credit card rewards and dividend investing. The brokerage, credit card, and funds you invest in can be your personal choice. You can also create a money machine by investing in index funds, real estate, or a combination of the two, or creating a cash-flowing digital business.
By being strategic with my credit card rewards and dividend investing (and reinvesting), I’ve set up my money machine to grow automatically. Even when I’m unable to contribute as much as I’d like to investment accounts. When I’m not making as large contributions as I’d like, I can still have a small peace of mind that my money machine is still growing over time.
If you haven’t started your money machine today, make a plan and start. Your future self will thank you.
Check out other posts in this series: An Extraordinary Life On An Ordinary Income