This is Part II of A Financial Epiphany.
In Part I, here, of A Financial Epiphany, I describe my experience waking up about money. I had gotten married, but had no savings outside of tax-deferred accounts. It was then that I decided to save and invest.
So immediately, I started directing all available post-tax funds to two purposes: savings and investments.
Fortunately my wife is very frugal, and as part of this change, I became more so myself. Which meant that I was all of a sudden spending less money. Which helped tremendously.
For savings , I used an online bank with a high-yield savings account. But how to invest?
I knew that people invested money to get money. But it then occurred to me that investing is a way to make money without having to work at a job for it. Now I would agree that working at a job is investing of a kind; you trade time and accomplishment for money. But if you use some money to take a risk, sometimes there is a reward. I knew I needed to find a way to improve my financial situation without having to take on a new job.
For investment of money, initially I was stymied. There is so much noise about investing, and so many ways to do it, that it seemed easy to get lost… either investing in the wrong things, or getting taken advantage of, or get eaten by high fees. But after reading a lot, and thinking about it, I decided that a low stress way of investing was the right one for me.
Enter Dividend Investing
My choice is dividend investing. The point of dividend investing is to buy shares in good quality dividend-paying companies with the goal to over time grow dividend income. Over time, dividends tend to increase, so with time I can own more and more shares in dividend-paying companies, so my income from dividend would grow.
There is much that can be said about this method of investing, but just like any method it has is proponents and detractors. So the key to personal comfort when investing is to find the way that works for you. No advice from me or anyone can take the place of making a decision for yourself based on what is best for you.
You can read about the advantages and disadvantages of dividend investing in other posts. This post is about how I invest and why, and here I write about what is realistic; a discussion of the downsides of dividend investing is here, and here is a post on how not to get discouraged when dividend investing.
Depending on when you start, how much you invest, the state of the markets, etc., eventually if you are diligent you can expect that dividend income can cover some or most or all of your expenses. Starting small is as good as starting large: the important thing is to start.
Once you start, keep working on it, add more to it. I should repeat this point: To grow dividend income means you need to increase your investments over time. Once you have reached the point where a significant portion of expenses are covered by dividends, you will find yourself already in great shape.
What does it mean to be financially independent? It means that I am no longer dependent on most external factors. The vagaries of employment mean that a good job is as great as it lasts, but can you count on it? Factors outside of one’s control shape our world, and employment is no exception. Layoffs, corporate decisions, customer demand or lack of it, capricious bosses, government policy, weather, etc., all are things we cannot control but which control our lives, especially our employment.
The point here is if we have income coming in that is not dependent on having a job or pleasing a boss or most other factors, we have our independence.
But, you might say, aren’t you dependent on these companies you have invested in continuing to pay dividends?
Yes, it is true. When you have dividend income, you are dependent on these companies to continue pay their dividends. So in that way, you are also dependent. But it is not as fickle a situation as being employed.
Suppose you have a second home. You decide that you want to rent it out and get some income. All things being equal, you get rental income. Are you dependent on this rental income? In a sense, yes. You can worry all day about what could happen and what could go wrong, but if things progress as they normally do, the rental income comes to you. You need to take care of the property and pick good tenants, and those all are normal things you need to in the real world.
It is similar regarding dividend income. There are ways to do the appropriate things. You need to pick strong companies, companies that not only pay dividends, but have staying power, and grow their dividends over time. That is why finding companies with strong dividend paying track records is important. No one can know the future, which is why I do not depend on one or only a few companies. I have spread out my investments among many dividend-paying companies. This is so if one company falters, it does not make a large dent in my income.
What happens If
What happens if for some reason you cannot rent out that second home of yours? In that case you will not get the rental income. If you only have that one other home to rent out, then you have no rental income. Let’s look at the situation if you have thirty homes to rent out. If one cannot be rented, you get 96% of your rental income instead of 100%. That may not be to your liking, but it is better than getting no rental income.
Similarly, if you own shares in thirty companies, and if one company cannot pay dividends, you still receive 96% of the expected dividends instead of 100%. That may not be to your liking, but it is better than getting no dividend income. That is why we diversify.
Have you had a moment of clarity about money? What happened to you?
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