Saturday, July 4, 2015

Happy Financial Independence Day

Before I begin my message, I wanted to wish all my readers a Happy 4th of July. And I wanted to thank all of those military members for keeping us safe and able to enjoy our independence and freedom.

For the past seven and a half years, myself and my readers have been on a quest to achieve financial freedom with dividend growth stocks. So I wanted to take some time and reflect the accomplishments that we have all achieved in the past 7 – 8 years.

Financial independence is the point at which the passive income exceeds expenses. People who achieve financial independence have the freedom to live their lives true to themselves. Most importantly, financially independent people have options in life. These options could include:

1) Working in a field they are passionate about, but which doesn’t pay much
2) Caring for a child or a relative
3) Engaging in non-profit work, volunteering or charity
4) Writing a book
5) Traveling the world
6) Fill in the blanks (this is your passion so you have to decide what you want to do)

I know that this site is read by investors of all ages, backgrounds and places in life. This could include those who are already financially independent, as well as those who are on their quest to get there. Early financial independence is something that few achieve, most notably because it takes a tremendous amount of work, and dedication.

No matter what place in life you are in, you know that to achieve financial independence:

1) You need to have an actionable goal,
2) You need to specify the time it takes to achieve that goal, and
3) You need to have the methods you will use to achieve that goal.

I do not know how you can achieve financial freedom, but I know how I have been working to achieve financial freedom. I am on track to reach the dividend crossover point somewhere around the end of 2018. Getting to the point of financial independence is a result of constantly living life with the end goal in mind, while simultaneously also enjoying my life.

As I mentioned when I started the site, back in 2007 I graduated from college debt-free. Actually I had approximately $2,000 in my checking account. I achieved that by working 30 – 80 hours week at several jobs during college, getting a high GPA to earn scholarships, and meeting great people who were also trying hard to better themselves. It also helped that I picked a major that I enjoyed and also had decent chances of finding employment. Setbacks along the way were frequent, but that helped me develop thick skin and keep persevering.

I have never had any consumer debt in my life. I think I have been lucky that I was born poor, which meant that my family always had to live within or below its means. As a result, I always had a deep desire to achieve financial independence, and never really understood how someone can get themselves into debt by spending more than they earned (other than a mortgage).

After finding employment, I managed to live like a student for a few years, while saving high amounts with every paycheck. Merely saving money is not going to result in financial independence however. You need a plan to invest that money. When I become financially independent, I want to make sure that my money can keep producing growing streams of income to live off of. I have been investing in dividend growth stocks for 8 years now, which work hard for me in producing an ever growing stream of passive dividend income. When my money works hard for me, I can allocate my energies elsewhere. When I invest in quality dividend paying companies such as Johnson & Johnson (JNJ), Diageo (DEO), Altria (MO) or Kinder Morgan (KMI), I get to earn a higher level of dividend income every year. I have tried to distill much of what I do in this series of posts. But you all know that investing is as much art, as it is science. You need to keep accumulating knowledge, in order to be able to recognize opportunities and profit from them.

It is important to understand the simple math behind early retirement. If you save 70% of your income, invest in dividend paying companies yielding 3% and growing earnings, dividends and share prices by 4% per year, you will be able to retire in approximately 10 – 11 years. If you only save 50% of income, you will be able to retire in 18 years. At a 40% savings rate, it takes 22- 23 years to reach the dividend crossover point. If you only manage to save 30% per year, you will be able to retire in 27-28 years.

A big part of what I have not discussed, is the fact that I hustled a lot. Saving money from my job was important, but there is a limit to how much I can save. An even more important thing was finding ways to earn more money. I achieved that by increasing the value of my human capital. This means I frequently asked for more responsibilities at work, I received an advanced degree, and professional certifications. I have also frequently changed jobs and locations every few years or so, in order to increase my income. Luckily, I paid attention to my economics courses, because I always looked to work in places with low cost of living, in order to make sure that my income grows in real terms as well. If you live in the Midwest, you know that each dollar buys much more than on either the East or West coasts. So the cost of living is much cheaper.

I also managed to earn more by hustling more. Writing this website for the past 7 – 8 years is a part  time full-time job in itself. It takes a lot of time to write posts, have intelligent discussions with readers and network with other individuals who share similar goals. I have been really lucky however that I have received support from a lot of readers. Without those readers, I would not have been able to be as successful as I am today. If several thousand of you didn’t read my site every day, I wouldn’t have been where I am today. Of course, the reason why I started this site, was to discuss ideas and strategies for investing money, and connect with other investors. Earning money from this site has been a welcome surprise, but was never the goal.

This goes both ways too, because I often receive emails from people, who have started their journey to financial independence after reading my site. I know for a fact, that many of the sites dedicated to dividend investing which were started after 2009 were inspired by my efforts on Dividend Growth Investor website.

Having multiple streams of income is very important if you want to achieve financial independence early. I would encourage all of you to develop them. Let’s say that you save 25% of your income. If you find a way to increase your income by 25%, and you can keep expenses constant, you will have essentially doubled the amount of savings you can produce. This simple math is mind-boggling. I have had several friends, who have developed them, either by getting a second job, or starting a side business. The opportunities are everywhere.

The thing that I really enjoyed about my journey, is the fact that the lessons I learned from business, are applicable to everyday life.

For example, I have learned a lot about synergies, after analyzing a lot of companies. However, I applied this concept in my life, when I moved in to live with my significant other. It made no sense for each one of us to pay money for a one bedroom apartment, when we can both rent a larger apartment that costs less per person? This is my favorite type of synergy.

The other synergy I have achieved is in knowledge. For example, in my day jobs, I leverage my knowledge of accounting, finance and business. In my investing, I use those skills to analyze and select investments. I read a lot in my spare time, but mostly related to finance, accounting, business and economics. I also write a site about investing in dividend paying stocks. You can see that by focusing my efforts, I can gain more out of my knowledge, and that knowledge is applicable in different activities. All of those activities are interrelated, and they also increase my circle of competence. As Buffett says, "I am a better businessman because I am an investor, and I am a better investor because I am a businessman". You would be surprised how many profitable investment ideas I get, as a result of my experiences in business. This is one of the reasons why I do not plan on quitting my job to simply write online for a living. I would go stale after a few years if I just focus on one thing. By having a job, I have been able to see first hand how different industries work and operate, and thus expand my circle of competence. Those industries include energy, technology, retail, real estate, education, etc. If I decide to quit work, I would likely quit all work related activities altogether. This probably includes this site as well. But we would worry about that by the end of this decade.

My business education has been very helpful in constantly optimizing my finances. I ignored the power of tax-deferred compounding for the first years of my journey. Luckily, I wisened up, and have been maxing out every single tax-deferred account I am eligible for. This has provided me with even more money to allocate, as it has reduced my tax expenses substantially.

I was inspired by Warren Buffett, who is not only the best investor in the world, but also knows how to gain the best advantage for himself. Warren Buffett has been really smart and creative in implementing strategies to minimize or eliminate the tax burden on Berkshire Hathaway. For example, he exchanged his stake in Washington Post for shares of Berkshire Hathaway that the Washington Post held. As a result of structuring that transaction properly, Berkshire Hathaway saved hundreds of millions of dollars in taxes on its gains on Washington Post stock over the preceding four decades. Buffett’s deal to exchange his stake in Procter & Gamble for the Duracell business is another example of that.

To summarize, we all have different reasons to achieve financial independence. In order to get there, you need to have a goal, a plan to achieve that goal within a certain timeframe, and develop the frame of mind to live your life in order to achieve your goal. It is important to continue building up knowledge, optimizing life, and find time to enjoy it. In my case, I wanted to earn enough dividend income, to be able to cover my expenses. I am on track to achieve that around 2018. I am on track to achieve this by aggressively pursuing my goal through decreasing expenses without sacrificing quality of life, increasing income, and investing in what I know.

Full Disclosure: Long KMI, MO, DEO, JNJ,

Relevant Articles:

How to retire in 10 years with dividend stocks
How to Generate an 11% Yield on Cost in 6 Years
How to become a successful dividend investor
How to accumulate your nest egg
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