Why You Shouldn’t Spend Your Investment Returns

While it can be tempting to start treating your investment account like a savings account — withdrawing cash when you need it for discretionary spending, doing that means you might be missing out on a couple of benefits. Spending the returns earned from your investment portfolio should generally be avoided for the following reasons :

1. Compounding growth is limited. Drawing down on your portfolio income reduces the base on which future investment gains can accumulate over time through compounding. Even small withdrawals today can have an outsized long-term impact. For example, if your investments returned 8% per annum (like our KEF currently does), you would double your investment about every 9 years. You can do the calculations here yourself.
2. It weakens overall financial health. Investments designated for long-term growth should not be mingled with short-term consumption needs. As this blurs the line between savings and wealth-building, putting your long-term plans at risk.
3. Increased sequence of returns risk. Pulling investment income, especially in down or volatile markets, crystallizes your losses and depletes the base needed for recovery when the market eventually rebounds. This “sequence of returns” risk does the most damage early in retirement.

The Kudy takeaway? View investments as a separate engine completely set apart from savings, generating long runway for compounding. Establish alternative cash reserves in your budget if investment income is being relied on for spending. The patience and discipline to stick to these points will be rewarded over an entire investing lifetime.

I hope this provides a helpful overview on why spending investment returns can undermine compound growth!