The world of financial blogging is extremely interesting to me. I find that it's a community of well informed people who generally have a fantastic outlook on money and life itself. Everyone is usually overwhelmingly positive and it causes somewhat of an infectious attitude towards money. I encourage everyone that is interested to start following some of blogs on Twitter (I'll publish a list of my favorite ones soon). The blogs may be good at keeping everyone on track that are already underway, but I think that at times, they can be a little discouraging for people just starting out, or maybe haven't started at all. This is not just blogs, it's mainstream news as well. I'd imagine some of the things I read are quite detrimental to a beginners psyche and I now have a good idea of why people find it so difficult to get started...so hopefully this article will provide you with a little bit of hope, and some easy initial benchmarks to reach.
Let’s go through a couple things that come to mind:
"The first $100,000 is the hardest to save!"
No shit. The average person in this country has less than $5,000 in their bank account. So, yes, I agree, the first $100,000 is the fucking hardest. By the way, so is the first $1,000, which is a far superior goal for the average person who is thinking about cutting back expenses and starting to save/invest. Often times setting your sights on benchmarks that are 5,10, or even 20 years away is a very bad way of setting goals. Let's start at $200, $500, even $1000 invested before we think about $100,000 (which is apparently the "hardest").
"Contribute at least $2,000 at a time to avoid high brokerage fees!"
We now know that if you use Robinhood, you won’t have to worry about brokerage fees. I often buy 5-6 stocks at a time, investing $200 or less in all of them. It allows me to diversify and feel ownership in more than one company at a time, but since I don’t pay trading fees it doesn’t have a negative impact on my wallet. That being said, it’s still annoying when someone is implying that we all have $2000 to throw into the stock market when we want to. Often times, that $2,000 can represent 6 months of hard work and discipline for someone with a lower income or higher expenses (or debt).
"A million dollars isn’t enough anymore for retirement!"
This one is especially awful….so let’s take what seems like is an insurmountable amount of money for someone who has exactly $0 invested, and then tell them it’s not fucking enough! It all depends on what kind of retirement you'd like to have. A million dollars is plenty for most people that will want to work part time for at least the first part of their retirement. This statement seems to be a particularly prevalent “fuck you” to the common man. Very discouraging to hear when you are starting out by trying to put away $50-200 a month.
Based on those 3, you get the idea. You'll definitely run across things like this all the time on financial websites. Never let these types of themes discourage you from getting started. Everyone's life is unique, which certainly includes your financial life. We all have different incomes, expenses, and debts. Set some goals and get going. Here's some basic advice I have to give, given that I am only about 3 years into my investing life and the feeling is still pretty fresh in my mind:
Focus on building a savings habit
If you get into the habit of putting away X dollars per month and spending Y dollars, it will soon become ingrained into your routine. You know what you’ll have to do to keep up the momentum. As you begin to earn more money, it’ll feel unnatural to spend more, thus upping your savings rate. Personally, I spend about the same amount of money I did 5 years ago when I was earning about 60% of what I make now. All the extra has gone into investing.
Begin to love investment
This is easy for some and impossible for others. I check my stocks probably once every hour at least, which can DEFINITELY be classified as a utter waste of my time. I enjoy seeing what is happening with all my stocks, so it’s just what I like to do. If you aren’t one to enjoy investment, then…
Begin to love your money
Know that every time you spend money on unneeded things, it's money you will never get back. That’s not to say cut out all the things you enjoy, just pick and choose what is worth your money and what is not. And if you can’t get into this one then…
Enjoy your income
It’s free money every single month. Work hard one month and watch the income trickle in every following month for absolutely no more work. Even if you hate investing, I’m sure you won’t hate the extra dollars coming in every month or quarter.
See the progress monthly
Dividend cuts and reductions can be very rare if you pick the right stocks. Granted, picking the right stocks won’t exclude the situation from occurring every now and then, but as you diversify (spread money across more companies) and grow your portfolio in terms of dollars, dividend cuts/decreases will have less and less of an effect on your income. Therefore, dividend income always goes up, even if you don’t add any more money. Dividend increases are likely for most of the companies you own, especially if you put emphasis on companies that are on the dividend aristocrats list (that raise their dividends once a year). Want more progress? Keep adding more capital to your portfolio. Progress is very easy to see and should be motivating unless you are a robot. I wrote about five companies that would be good to start with, in my opinion, here.
Do projections to see what your pace can lead to
If your dividend income is very small, think about what it will become if you get a plan in place. Let’s say you save up $1,000 and invest it in Target @ its current 3.1% dividend yield. Target has been rapidly increasing their dividends lately, averaging around a 20% annual increase in the last 5 years. Now...this probably isn’t very sustainable over the long term, but it's reasonable to project a 5-10% annual increase for the next 10 years.
Let’s look at a 5% annual dividend increase. In 10 years, your dividend yield on that $1,000 would grow to be 5.04%. So instead of earning $31 per year that you'd earn with a 3.1% yield this year ($2.58 per month), you are earning $54 per year ($4.5 per month), just by hanging onto your investment. In 20 years, your yield on the first $1,000 invested would be 8.22%. That would shell out $82 per year ($6.85 per month). So simply investing the money today - your dividend income will more than double in 20 years (a 164% increase to be exact).
Let's now say TGT crushes it for the next 2 decades and increases their dividend 10% over the next 10 and 20 years. In 10 years, your dividend yield on that $1,000 would grow to be 8.1% and pay out $81 per year ($6.75 per month). In 20 years, your yield would grow to 13.1% and you'd be receiving $131 per year ($10.91). That is now a 322% increase in 20 years.
Now….do this projection for all your stocks if you'd like. Just look up the average dividend growth rate for each and project it out for 10, 20, 30, or even 40 years. 10% increases for the long haul is probably not too realistic for most stocks, so using 5-8% per year is probably best for stocks you think will be successful. If you are feeling like your portfolio is growing too slowly, projections can help re-assure you that you are on the right track toward building a nice income.
Here are some basic calculations that will show you how much you need invested to get something for free every month. It should make you feel better about putting more and more money away and seeing the returns build. After all, there’s nothing better in this world than free shit, right? Even if you don’t actually pull out the $8 per month for your free lunch or $50 a month for your free cell phone bill, it’s still nice to know that you could. When you are just starting out, I’d strongly recommend just re-investing your dividends and buying more shares with your income. The point of this visualization exercise is that you should think about the income you are creating for the future in terms of what it buys you on a regular basis. Once you cover the expenses you want to down the road, you can cut back your hours, find a new job you enjoy more, or even retire completely if you have every expense covered. There are plenty of different ways to think about the future, so I will just keep it at a general level here.
(If you are curious about how I’m calculating these, simply take your monthly cost, multiply by 12 to get the yearly income needed and divide by .035 - 3.5% average dividend yield)
$8 per month - One free meal per month at Chipotle ($2,742 invested)
$10 - Spotify ($3,428 invested)
$36 - One free meal per WEEK at Chipotle ($12,342 invested)
$50 - Cell Phone ($17,142 invested)
$100 - Cable/Internet ($34,286)
$250 - Groceries ($85,714)
$300 - All Utilities ($102,857)
$800- $1000 - Rent ($274,286 – $342,857)
So if and when you read financial blogs, find your way of staying motivated if people are talking about higher dollar values or phrases you find completely ludicrous, like “a million dollars isn’t going to cut it anymore”. It can be pretty overwhelming to read websites where the writers are 5, 10, or 15 years into their savings plan when you haven’t started yet. I’d start out by setting benchmarks like the ones above. Start to look down at your monthly budget for new ideas. What do I need to save in order to pay my cable bill every month? Pay for my morning coffee? Pay for my gas? How much did I need to invest in order to fuel that $100-200 shopping trip? Pretty soon, you'll be covering multiple things on your budget and your income will be increasing by the day! Indirectly, you'll probably be looking at your purchases differently, knowing you could have skipped some items and earned a free lunch every single month for the rest of your life instead.