Kevin O’Leary views his portfolio as a ‘chicken on a spit dripping cash’ — says his family ‘lives off’ the yield that his assets generate. What he means and how to copy Mr. Wonderful

That’s where he learned one of the most pivotal money lessons of his life. “She’d say to us, ‘Boys, never spend the principal, only the interest,’” he says.

Decades later, he still applies this rule while managing his fortune. “I view my portfolio, and my trust and my positions as a chicken on a spit dripping cash,” he says. “Everything has to generate yield … I take that, I disperse it. The family lives off that, the charities I’ve committed to.”

Here’s why preserving the principal is so critical for wealth creation.

Preserving the principal

Resisting the temptation to spend accumulated cash allows it to grow. For instance, if you have $100,000 invested in an asset that delivers a 5% return every year, you could reinvest the payouts and double your wealth in roughly 15 years.

If you spend 5% a year, your wealth won’t grow. Fifteen years later you would still have roughly $100,000 in savings. However, if you spend 10% of your original savings per year — that's around $833 a month — your wealth would be cut in half within just 8 years. If you keep spending at this rate you will erode over 70% of your original $100,000 savings within 11 years.

Simply put, if you eat the chicken you can’t expect any eggs. Consuming more than your yield, eats into your principal and moves you closer to running out of money. To harness the power of compounding and grow your money exponentially, your returns need to be invested and generate returns. This is why savvy investors like O’Leary and his mother focus on preserving capital and maximizing yield.