I recommend reading Moin’s article on the essence of making money work for you. This provides the relevant context for Series 4, Protecting the principal invested
Let’s get right to it. The last principle which one needs to apply, is to never touch the principal.
Principal – Principal is the original amount of investment made
What does it mean, when someone says you should never touch the principal?
Principle basically means, the amount of money you put aside to invest initially.
This means whatever money you’re using to invest, should not be touched as far as possible, as they are decisions one is making to secure a long-term future.
For eg Let us look at a company named Fortescue Metals Group Ltd (ASX: FMG), so that you have a real life
I currently own 374 stocks of FMG, purchased at $9.27 which include brokerage fees.
The principal amount invested was $3481.93.
Let us look at the table below, to understand why I would never touch the principal, assuming the company grows in the same rate as the Australian Stock Market Index and whatever dividend is paid is invested back into the business. (FMG currently pays $1 for every share owned, annually)
The assumptions made is that the company will grow at 5% p.a. and the current dividend yield is 5.41% p.a. We also assume the dividend amount stays the same, throughout the lifecycle of the company.
If the money is made to work for you, the table below shows its value for 5, 10, 15, 20 and 25 years.
The above table shows, why you should never touch the principle. A principal amount of $3500, has the amount to transform itself if you do NOT touch your principal.
For this to be easier and have the base which allows it to work, I set up an emergency fund to cover myself and my family for 6 months as the first step before I started my investment journey.
I realised later how important this step was, as there is no point investing if I was just going to sell at the first emergency that I came across in my life.
Most of us are already at a disadvantage because we trade our time for money, working full time jobs to have a source of income.
For people like you and me it becomes doubly important to understand why we should never touch our principle.
As a result any money we spend from our income is directly reducing our wealth, which is why following the 4 money habits series becomes the foundational pillars to understand, digest and put into practice.
This is not financial advice. Please read our disclaimer.