Hello everyone,
MMM is always talking about the 7% rate on investment in Vanguard Index.
I am from Israel, We don't have such a thing. What We do have is called "trust fund" (approximate translation).
Here is a wikipedia article explaingig what is it:
http://en.wikipedia.org/wiki/Collective_investment_scheme.
The thing is, it only makes approximately 5%, and that is before inflation.
But that is not My problem.
My problem is I cant understand what MMM means when He is talking about:
1. Living on passive income from that 7% (or 5% (before inflation) in My case)*.
2. Reinvesting the passive income (or part of it) to make more passive income.
Now, let Me explain. This "trust fund" is very similar to stock in that way that You buy "units" of this "trust fund"
and then, after a year the price have gone up 5% (before inflation).
Lets say I bought 100 units for 1$ each.
After a year, those 100 units now cost 105$, e.g., each unit now costs 1.05$ (105$ divided by 100 units).
You see, what I don't understand is:
3. How do I get those extra five dollars I just earned?
4. How do I reinvest those 5 dollars?
The only possible thing to do (as I see it, therefor I need Your help) is to sell 4 units for 1.05$ dollars each and get 4.2$.
But:
5. Now I have only 96 units (that were originally bought at 1$ each). Now each unit costs 1.05$ which means in total 100.8$ (96 units multiplied by 1.05$). Next year it will grow by 5% (before inflation), e.g., 105.84$ --> More then the year I had before (last year it was 105$), this good.
6. But now I only have 96 units left. This is bad. I Will run out of units at some point. I guess I can buy the 4 units back for it to be 100 again, but:
6.1 Now the price is 1.05$ --> So it is bad to reinvest again because I now 4 units of those 100 units cost Me more (1.05$ dollars and not 1$).
6.2 Or I should not sold them in the first place, but then, where is My passive income?
Thanks in advance. Refael Sheinker from Israel.
P.S. The 5% percent before inflation is also before tax of 20%.
P.P.S I talk in dollars to make it easier because most of the readers are from USA.
P.P.P.S If I get lucky, MMM himself might just answer My question.
P.P.P.P.S This is My first post ever! How was I?
*Wow, double parenthesis.**
**Wow, I now use the asterisk thingy just like MMM, I need a therapist... I think...