Tag: Wealth Creation

Mistakes I Made on the Way to the Double-Comma Club.

This week, I heard a statistic on YouTube that 49 is the average age for people to become a millionaire in the United States. I can only assume that it’s approximately the same for Canadians. Speaking from personal experience, that statistic is bang on. And I managed to do it while making some very big mistakes.

Mistake #1 – Buying mutual funds instead of exchange traded funds

When I first started investing, I bought mutual funds instead of exchange traded funds, i.e. ETFs. One of the reasons for this was that ETFs were not widely known in Canada at the time. I can’t be faulted for working with the information I had at the time.

Where I can be faulted is for continuing to invest in mutual funds after I learned about ETFs.

See, the only beef I have with mutual funds is their price. The management expense ratios, aka: MERs, of mutual funds is always higher than the MER of the comparable ETF. Investors have to pay MERs to the financial institutions that offer mutual funds and ETFs. Fine – people need to get paid. I understand that.

However, there’s no evidence that paying higher MERs results in better outcomes for investors. If anything, it’s the opposite. Paying higher MERs means smaller portfolio values for investors.

Over a long-enough timeframe, the difference in MERs can mean seeing hundreds of thousands of dollars less in my portfolio. That’s a very bad thing. It means that investors paid more for management expenses and wound up with less money. Check out this calculator and play with the numbers for yourself if you don’t believe me. Adjust the expense ratio and you’ll appreciate difference there is between an MER of 2% and an MER of 0.5%. The money that doesn’t go to the final institutions is money that stays in your portfolio.

Eventually, I realized that keeping my investments in mutual funds was only hurting me. So I sat down, completed the necessary forms (which took about 10 minutes), and sent the proper instructions to have my money moved into ETFs. I have never regretted my decision to make the switch.

Mistake #2 – Investing for dividends instead of for growth

This mistake happened because I’m an inherently lazy investor. The idea of passive income via dividends appealed to me! I wouldn’t have to work and money would still come to me?!?!! Once I’d understood what dividends were and how to get them, I couldn’t invest in dividend-producing assets fast enough.

So, instead of investing in equity-based mutual funds and ETFs, I invested in the dividend equivalents. Every month, I earned a few dollars. Eventually, I was earning hundreds of dollars each month. That sum crossed the 4-figure amount. Today, my dividends are enough to cover all of my basic annual expenses for food, shelter, transportation, and clothing. There’s even enough to cover some of my wants, stuff like short trips, concerts, and theatre tickets.

I try not to think about the fact that I would’ve been able to retire 5 years ago if I’d invested that same money into equity-based products. By investing solely in dividends, I missed watching my portfolio benefit from the 11-year bull run in the markets that happened between 2009-2020. If I’d invested in growth ETFS, my money situation would be so much better. I can only imagine that my portfolio would be worth double – maybe even triple! – what it is now.

I corrected my mistake in October of 2020. As the stock market was recovering from the pandemic, I tweaked my investment plan. (I should’ve made this move in April of 2020, but… coulda-shoulda-woulda, right?) Instead of investing in dividend-generating ETFs, my contributions are directed towards equity-based ETFs. The difference its made to my portfolio is remarkable. Even during the downturn we all saw in 2023, my portfolio was happily chugging along. I’ve more than recovered what I lost during the steep market declines of 2020.

Mistake #3 – Not understanding the 4%-rule

Admittedly, it can take me a very long time to understand certain things. For example, I still don’t understand the importance of the P/E ratio when assessing stocks. However, I’m not a stock-picker so I don’t worry about this blank spot in my understanding of investing. If I ever do decide to become a stock-picker, I’ll study the topic of P/E ratios and go from there.

One of the investment concepts that had me stumped was the proper application of the 4% rule to my portfolio. I didn’t understand how to use the percentage to fund my retirement. Sure, I could appreciate that 4% of $1,000,000 is $40,000. What I didn’t understand was whether that $40,000 came from the $1M-principal amount or did it have to come from the earnings generated by that principal? And what was I supposed to do if my portfolio had an annual return of less than 4%?

In other words, I always wondered what the 4% represented. Was I supposed to be taking 4% out of my portfolio’s principal every year in retirement? Or was I supposed to aim for an annual return of 4% and then only withdraw those earnings?

Roughly 5 years ago, I started to fully understand that the 4% rule traditionally means taking out 4% of the principal value of one’s portfolio and living on that amount. The 4% rule is meant to effectively decrease the value of one’s portfolio so that a person can pay for food, shelter, and living expenses in retirement.

So if I started with $1,000,000, then I’d take out $40,000 and leave the remaining $960,000 invested. Hopefully, the remaining $960,000 would still be earning 6% or more. Then, those earnings would be added to the $960,000. The following year, I would withdraw 4% of $960,000+earnings (whatever that amount wound up being)… The remainder after year 2’s withdrawal would remain invested to earn more money, and then I’d repeat the cycle in year 3.

This is not a bad strategy. It does mean that the portfolio is canabilized a little bit each year. Also, if the annual return is less than 4% in any given year, then the value of the portfolio decreases faster than the investor may want it to.

That said, my personal goal has always been to live on the dividend income earned from my portfolio. By living on the earnings, my portfolio remains intact. In other words, I don’t have to sell my portfolio in 4% chunks every year. The assets within my portfolio will continue to benefit from compound growth and my earnings should increase accordingly.

Mistake #4 – Ceasing my contributions during the 2008 recession

This one is a doozy. It’s one of the worst investing mistakes I could have made, aside from the two mentioned at the end. I try not to castigate myself too badly because I was young, and far less informed than I am now. The internet didn’t offer the same kind of information that it does now, and I had few real life examples to emulate. I made the decision that I thought was best at the time. I just happened to be very wrong.

When the stock market crashed in 2008, I saw the value of my portfolio go down. I stopped investing. I’d had an automatic transfer in place. Every two weeks, a certain amount of my paycheque went into my investment account where it would be invested into pre-selected mutual funds.

When the stock market dropped in 2008, I halted my automatic transfers. The mists of time have impacted my memory. I can’t exactly remember how long I stopped investing. Let’s say it was 3-6 months. I could kick myself for making that choice! During those 3-6 months, when the market was low, I should have been buying more units in my mutual funds when they were super-cheap. The stock market was on sale and I chose to wait until the prices went up before I resumed buying into it.

Who goes to the grocery store and says “Wait! This food is too cheap! I need the price to increase significantly before I buy some more”? No one says this, ever!

So when the pandemic delivered a gut-punch to the market in March of 2020, I knew not to make the same mistake. I continued to invest my money. I even scrounged up a few extra dollars and made an additional contribution outside of my regular investing schedule! Today, 4 years later, I’m so very pleased with Yesterday Me for sticking to my plan. Yesterday Me had learned from the past and ignored the Talking Heads of Doom who were out in full force as the coronavirus spread across the planet.

Conclusion

Making mistakes won’t prevent you from reaching your financial goals. I’m proof of that! I made 4 very big mistakes during my investment journey yet I’ve still earned my way into the Double-Comma Club.

Let’s be realistic. There are 2 big impediments that are definitely going to stop you from becoming wealthy. The first one is living above your means, which is to say that your expenses are more than your income. If this is the case, then you’re in debt because you owe money to creditors. If you don’t have money to invest, then you’re hooped.

The other big impediment to becoming wealthy is failing to invest. If you never invest your money in the stock market, then it will never grow for you. Do not let fear stop you from investing. Accept that you will make mistakes. At the same, realize that you will learn from them. We learn a lot more from failure than we do success.

Every baby stumbles after their first few steps. But you know what that baby does? S/he gets back up and tries again. And again and again and again until s/he figures it out. You can do the same thing with your investment portfolio. Make your mistakes. Learn from them sooner. Keep investing and you too will eventually become a member of the Double-Comma Club.

So start today.

5 Simple Rules to Become a Millionaire

This week, someone asked me if I would consider writing a post about not drinking a daily coffee in order to become wealthy. I responded that I though the “daily coffee” is a red herring. By following a few simple rules up front, anyone will become a millionaire with enough time.

Rule #1 – Invest

Take 30% of net pay and invest it in well-diversified exchange traded fund. Do this every single time you get paid. If you get a raise, maintain that 30% proportion.

If you can’t start with 30% right away, then start where you can and increase the percentage by 1% every chance you get. I didn’t start at 30% right away either. However, after 30 years of investing, I’ve managed to hit a 40% savings rate. It didn’t happen overnight but it did eventually happen.

The more you can save, the faster you will hit the goal of becoming a millionaire or being financially independent. It’s important to start today.

I promise you that if you don’t invest any money today, then you will have very little of it when you need it the most later.

Rule #2 – Build an Emergency Fund

Some people recommend having 3-6 months’ worth of expenses set aside in your emergency fund. I’m a little more conservative than that. Personally, I would recommend 12 months’ worth of expenses. My personal mantra when it comes to emergency funds is as follows.

It’s better to have it and not need it, than to need it and not have it.

You know your own comfort level far better than I do. Ask yourself if you would rather have more or less money in an emergency fund?

Saving up this much money will take time, probably years. If it makes you feel any better, I’m still working on building up my emergency fund, and I’ve been tackling this project for a long time.

Rule #3 – Pay off your debt

Much like building an emergency fund, it may take some years to pay off all your debt. And I do mean “all” of it: vehicle loans, personal loans, student loans, credit cards, mortgage, etc… If you owe money, pay it off.

A mortgage may take decades to pay off. This is why I think it’s best to invest while paying down a mortgage and building your emergency fund. Should you get an inheritance, a lottery win, an insurance payout, or a huge raise/bonus at work, then maybe you can consider paying off the whole mortgage. There are a many factors to consider before this decision is made so consider it carefully and don’t make any hasty moves.

It might make more sense to invest the inheritance/lottery win/insurance payout/ raise-or-bonus in the stock market for long-term growth, then use the dividends generated to pay off your mortgage. That way, when the mortgage is gone you will still have a cash machine churning out an income for you. Check out this video for more details of this plan in action.

If you spend the inheritance/lottery win/insurance payout/ raise-or-bonus right away, then it’s gone for good.

Rule #4 – Use sinking funds

When there’s something you want to buy, save up for it first before you buy it.

Sinking funds force you to prioritize where you want your money to be spent. I believe that when you work hard for your money, it should be spend on the priorities that will make you happiest. Wasting money on the things that don’t bring you joy seems to be a poor choice. You will never get back the time and energy spent at work. Instead, you get a paycheque. It should be directed to building the life you really want because it represents your precious, precious time and energy.

I realize that our capitalist society does not encourage this way of life. The Ad Man and his trusty sidekick, the Creditor, are relentlessly exhorting everyone to buy everything they want immediately. My rule is about delayed gratification, not a popular choice for most folks.

However, if you want to become a millionaire, then it’s better to not send interest payments to creditors. It’s better that you invest that money so that you can reach millionaires status as soon as possible, if that’s what you really want.

Rule #5 – Spend your money

That’s right. After you’ve eliminated debt and you’ve funded your emergency fund, then it’s time for you to spend your money however you choose without going into debt.

Your investments are happily compounding in the background. Dividends are compounding each year on a DRIP, aka: dividend re-investment plan. You’re continuing to contribute 30% of your net pay even after paying off your debt and fully funding your emergency account. You’re saving up for everything before you buy it.

Keep investing. Stay out of debt. Maintain a fully-funded emergency fund. Rely on your sinking funds to meet your life’s goals.

If you’re doing these things, then you’re following the first 4 rules. Your day-to-day purchases will have no impact on your path to becoming a millionaire.

So spend the rest of your money however you want. Coffee? Travel? Brunch? Spa days? Pets? Hobbies? Wine club? Sporting events? Clothes? Shoes? Vehicles?

It doesn’t matter how you spend your money once the first 4 rules are being followed. Again, spend the rest of your money however you want so long as you stay out of debt.

Make Money While You Sleep

Passive income is my favourite kind. If there’s an easier way to increase my cash flow, then I haven’t found it yet. Generating passive income takes a modicum of effort on the front end, then time does the rest. You will make money while you sleep. It can’t get any easier than that!

When I first started investing in dividend-generating securities, my monthly dividends were roughly enough to buy a pack of gum. It wasn’t exciting and I didn’t tell anyone about them. Instead, I went about the business of setting up a dividend re-investment plan, aka: a DRIP, so that all those little amounts of money could compound as fast as possible. In the meantime, I sliced off a chunk of my paycheque every two weeks and sent it to my investment account. Over time, the monthly amount of dividends steadily increased. The first time I earned $1K in a single month was pretty exciting! My plan was finally working and I could envision living off my dividends in retirement. Woohoo!!!

What I love most about dividends is that they’re the easiest money I’ve ever earned. The money that I invested 30 years ago is still working for me. That fact still blows my mind. Yes – I had to go to work to earn a paycheque. And I had to live below my means, which is just another way of saying that I had to choose to invest-for-tomorrow rather than spend-every-nickel. Finally, I had to leave it the hell alone for a very long time so the DRIP could work its magic.

The beauty of a DRIP is that it compounds the dividends automatically. I don’t need to re-invest the same earned dollar over and over and over in order to see the dividend amount grow. The compound growth from that first contribution will continue indefinitely until such time as I sell the underlying investment. So every time I invest new dollars, I’m increasing the assets that will work for me 24/7/365. Those assets grow for me in two ways. First, each subsequent contribution makes my asset base larger. Second, companies increase their dividend payments. This is known as organic dividend growth, and I love it.

The invested dollars are the ones that are buying me my financial freedom, one paycheque at a time. I can’t deny that the size of my paycheque mattered too. After all, one can’t invest if one has barely enough to cover the bare necessities from one paycheque to the next. Thankfully, I wasn’t in that position. I was fortunate enough to be in a position where I had plenty leftover to splurge on the wants. Instead, I curbed that impulse and chose to invest a good chunk of my disposable income.

(Lest you think that I lived like a miser, rest assured that I did not. I’ve travelled to Europe 3 times in the space of 5 years, visited the US more times that I can remember, attended 3 destination weddings in not-inexpensive locations, maintained seasons tickets to Broadway Across Canada, gone to many concerts at home and abroad, and socialized atleast twice per week with friends. The pandemic slowed me down, but only because everything was closed for a bit. I’ve had many great experiences with family and friends, while avoiding the relentless marketing & exhortations to spend everything I earn.)

Looking back, I credit those three steps – earn, invest, DRIP – with putting me in the position that I am today. If it becomes necessary, I could live on my dividend income. It would be tight, but I could do it. Do you know how comforting that feeling is? I’ve reached Lean FIRE, as the kids call it.

One of my favourite YouTubers talks about how she set up an investment account for the sole purpose of paying for her home’s mortgage. At the time of her video, Dividend Dream had an investment account that generated enough cash every year to pay for her mortgage. Watch her video. After giving it considerable thought, she decided that it made little sense to liquidate her account to pay off her mortgage. I’m convinced that she’s right. When you have a cash machine steadily paying for some, if not all, of your expenses, there is no good reason to destroy it. It makes more sense to keep the cash machine running smoothly so you can live off the income it generates.

Speaking from personal experience, Dividend Dream’s method works. As I said early, my first few dividend payments were enough to buy a pack of gum. Then they grew to be enough to cover my monthly Netflix subscription. Soon after that, they were enough to put one tank of gas in my vehicle. The next big step was paying for half a mortgage payment, then a full mortgage payment. Today, my monthly dividend cheque is enough to cover 90% of my regular monthly expenses – both needs and wants. That’s pretty good, if I do say so myself.

Invested money works non-stop. It doesn’t get sick, need time off, or otherwise stop working for you. Once you get the ball rolling, there’s little else that you need to do. Earn the money then invest it in dividend-producing assets. Time will do the rest. You can sleep without worry, comfortable in the knowledge that you’re earning money through passive income. Unless you’re paid to sleep, I can’t think of a better or easier way to earn money.

Procrastination is the Thief of Time.

Truer words have never been spoken. When it comes to investing your money, procrastination is also robbing your wallet.

See – it’s like this. If you invest $0 today, then you’ll definitely have $0 tomorrow.

On the other hand, if you invest something, then you’ll have way more than $0. The more you invest, the more you’ll have. It’s a simple, direct relationship between the choices you make today and the outcomes that you’ll have tomorrow.

First lesson – invest your money. Start with what you can and work your way up. I suggest increasing your investment contribution by 1% every year. When you get paid capital gains and dividends, re-invest them.

Keep an eyes on your management expense ratios. The MER is the amount of money that is fleeced from your account. I look at it this way. The businesses that offer the investment products need to get paid too. That’s fair. What is not fair is me paying 2% per year instead of 0.35% (or less) for the same product from someone else.

Play around with this investing fees calculator for a little bit. It shows you the impact of MERs on your investment account. The longer you keep your account, the more money is siphoned away to someone else. By choosing good investments with lower MERs, you’ll be keeping more of your returns in your own pocket.

Second lesson – understand the impact of fees. Canada has a reputation for having some of the highest MERs in the world. The longer you pay higher MERs, the less money you’ll have for Future You when you really need it. Try to pick investment products with low MERs.

Don’t be afraid to make mistakes. You’ll always learn more from your mistakes than you will from your successes. Make your mistakes. Learn from them. Don’t make the same one over and over again. Your goal should be to earn-save-invest-learn-repeat. It’s a pattern that should never stop. As you learn better, you’ll do better.

Trust me. I started out investing in mutual funds with one of the Big Six banks. I wasn’t paying a 2% MER, but it was around 1.75%. I didn’t know any better. The Big Six bank didn’t even have a way for me to automatically deposit to my mutual funds every month. I did it in person, which got weird very quickly. So I went to an investment firm. I loved that investment firm, and I got wonderful service every time I called. Unfortunately, while the MERs were lower, they were still pretty high. But I didn’t know any better so I stayed with them.

Eventually, I started hearing about something called exchange-traded funds, or ETFs for short. They offered the same diversification as mutual funds but with MERs that were much, much lower. By the time Vanguard came to Canada, I couldn’t move my accounts fast enough.

Third lesson – make your mistakes fast so you can learn fast. No one is perfect at investing, and everyone makes mistakes sometimes. The key is to learn from your mistakes so you don’t repeat them. The biggest mistake that you can make when it comes to investing is to never start.

If you’re not yet investing, start today. If you’ve started and your MERs are too high, then move your accounts to equally good and less expensive options. If your MERs are low already, then work on increasing your contribution amount by 1%. Make sure you’ve turned on the dividend re-investment plan feature on all your investments. If your brokerage doesn’t allow for a DRIP feature, then move your accounts to one that does. Trust me on this. You most certainly want to have the DRIP in place so that your investment returns compound as fast as possible.

You’re smart enough to learn how to do this. The fact that you’re here, reading my blog, means that you have an interest in attaining financial security at some point. That’s the seed that’s needed to plant your Money Tree. By starting today, you’re preventing procrastination from stealing any more time from you.

Easy Money Is My Very Favourite Kind!

I love money. I always have, mainly because it allows me to buy all sorts of things. Hard money is good too, but easy money is better.

Hard money is the kind you have to sweat for. It’s what shows up in your paycheque after you’ve traded away a portion of your very precious, very limited time here in this world. You’ve shuffled a little bit closer to the end of that mortal coil in exchange for some money.

Great! Fabulous! You made the deal, and you got what you were promised. Hard money is earned through hard work.

Yet… if you’re fortunate enough to learn about it before your days are done, there’s a way for you to also receive easy money. This is the money that you don’t have to work for. It just arrives in your bank account – easy peasy, lemon squeezy. Whether you show up at the office, whether you get out of bed, whether you’re at home, at the top of a mountain, on a beach, or at sea. This money flows into your coffers without you having to do a thing.

Is it obvious yet? Easy money is my very favourite kind.

Some of the people in my family have acquired $44,000 in less than 5 years. How did they do that? It’s quite simple, really. They invested under the following conditions:

  • when the stock market was doing well before COVID-19 arrived;
  • when the market plunged at the start of the pandemic;
  • during the tepid recovery between late 2020 and the end of 2021;
  • during the turbulence of 2022; and
  • they’re still investing in 2023.

My family members invested in the stock market without fail and turned contributions of $21,000 into $44,000 without batting an eye. A minimum of $3,000 per year was invested into broadly diversified equity ETFs in each of the past 5 years. In the past 2 years, the contribution amount increased to $6,000 per year.

The initial $21,000 contribution amount is broken down like this:

  • 2019, 2020, 2021 = $9,000 invested ($3,000/yr into equity-based ETFs)
  • 2022, 2023 = $12,000 invested ($6,000/yr into equity-based ETFs)

Despite the ups and downs in the stock market during those 5 years, the invested money has more than doubled. Not bad… not bad at all. Money went in and it didn’t come out. My family members left it alone to do its thing, and “its thing” was to grow quickly in a short period of time. That’s all, folks. It wasn’t more complicated than that.

Someone had to work to get the initial $21,000, right? That was the hard money that has since been turned into easy money… the additional $23,000 of value that no one had to sweat for.

You can do the same thing for yourself, if you’re so inclined. Can you find $100 per week? That’s $5200 per year. Maybe you can only find $25 per week? That’s $1300 per year.

Whatever you can find, then you start investing with that amount and you move up from there. Wiser minds that mine suggest investing in growth stocks. They have a track record of higher returns. For my part, dividends worked for me but it took a long time to get where I am right now. If I had to go back, I’m not so certain that I would make the same choices. My sack of gold is heavy, but it could’ve been much heavier had I been smarter sooner.

C’est la vie, right?

You’re quite lucky in that you get to decide for yourself whether you want to only earn hard money. If you can read this blog, then you can start to make easy money. Slice off some portion of your paycheque every time you’re paid and send it to your brokerage account. I’d suggest opening a brokerage account at a place that has a list of commission-free ETFs that you can buy. As soon as you can buy one unit of a commission-free ETF, do so. When the dividend or capital gains from that investment rolls in, re-invest it and do not spend it.

You’re building a cash-machine. It will take some time. The dividends and capital gains will be paltry at first. Given time, they will multiply. I’ll never forget the first time my cash-machine spit out $100 in a single month. That was awesome! You know what was even better? The first time it generated $1,000 in a single month! Believe you me, the first $5,000 dividend payment has been the nicest yet.

So start today. You too can earn easy money. And if you love your job, great! No one’s telling you to quit. You can do your job for as long as it makes you happy. Earning easy money in no way eliminates your choice to work. However, if there’s the slightest, tiniest possibility that you might not always enjoy working for hard money, then follow my advice. Take the steps now to earn some sweet, sweet easy money later.

Increasing my Passive Income in a Few Clicks

This week, I gave myself a $600 annual raise. No, I didn’t get a promotion or take a different job. Instead, I simply increased my passive income by buying some bank stock. As I’ve said before, salary and income need not be the same thing. There are always ways to increase your income even if your salary isn’t going up as fast as you want it to.

Normally, I’m not a stock-picker. I love my exchange-traded funds because they pay me dividends every month and I get the benefit of diversification. Another way of saying this is as follows. My ETFs generate passive income, which is my very favourite kind of income.

Allow me to be extremely clear. I bought shares in this bank solely because I’d received a stock tip from my sibling who is very wise and very methodical about certain things. Stock tips that come my way are generally disregarded instantly. Like I said, I’m a believer in ETFs and that’s where I’ve been investing my bi-weekly contributions to my investment portfolio since 2011. So why did I listen to my sibling this time around? Why did I act on this particular stock tip?

First, I understand what banks do. They make money, hand over fist, year-in-year-out. Some of that money is paid out to shareholders in the form of dividends. Given that I’m looking to retire within the next 10 years, I want to build a steady stream of reliable cash flow to fund my retirement. Dividends fit the bill. They also receive preferential tax treatment, which is a nice cherry on top of this tasty sundae!

Secondly, the bank I bought pays over $1/share in dividends 4 times each year. For every share I own, I’ll be making $4 per year. An extra $4/year? Big whoop! Remember that it’s an extra $4 per year per share. The more shares I have, the more dividends I earn. And I’m a huge believer in the dividend re-investment plan, which leads to my third point.

Thirdly, my brokerage will allow me to DRIP the quarterly dividends from this stock. I’ll “only” acquire 2-3 new shares every 90 days from this initial purchase, but each of those DRIP-stocks will also earn over $1 per quarter and will also lead to the purchase of even more bank stock. I’ll be benefiting from exponential growth in the number of shares that I’ll own, which means that my passive income will also be growing exponentially the longer I hold this stock.

Fourthly, the dividend payout of these shares is likely to go up. The bank stock I purchased this week has increased its dividend for the past 5 years, so it is considered a Canadian dividend aristocrat in some quarters. (Check out this article from Million about dividend aristocrats if you’re interested in learning more.) Increases in dividend payout are also known as organic dividend growth, a feature of dividends that I like very, very much.

Fifthly, I can keep earning these ever-increasing dividend amounts forever. I’ve created a beautiful money-making cycle that will continue as long as I’m alive. Unless I shuffle off quickly, this stock purchase should soon be paying me $1000 per year, then $2000, and so on and so on and so on. It’s the beauty of the DRIP meeting compound growth.

Finally, if there comes a time when I need to stop my DRIP and live off these dividends, then I can do so. While I’m always thinking of ways to increase my retirement income, I assure you that I don’t plan to live on the entirety of that income unless I have to. For my whole life, I’ve lived below my means. Presently, I don’t see any reason to stop doing so when I retire. The dividend income from my ETFs and my pension should be enough to cover my expenses when my employer and I part ways. If I don’t need the passive income from my bank stock to live, then I see no reason to stop the DRIP.

To recap, dividends generate passive income. Ergo, dividends are my favourite kind of income. This week, I had the opportunity to increase my passive income so I took it. The benefit is that I’ve increased my annual income and I’ve bought myself a little bit of insurance that I’ll have enough money to pay for things when I’m too old to return to the workforce. In the meantime, I’ll sit back and let the magic of compound growth do its thing via my DRIP. It’s all good!

You Will Either Be Rich or Poor

Future You is going to be rich or poor. The choice is yours.

This post is aimed at those folks who fall between the two ends of the financial spectrum. It’s not for those who are already uber-wealthy, nor is it for those who are living paycheque-to-paycheque. Rather, I’m aiming today’s words at the ones who still have to work to pay their bills, who have some fat to cut from their budgets if necessary. These are the people who still have financial options. Choices made today will determine if they are rich or poor in the future.

Inflation eats away at everyone’s spending power. It is imperative that you accept this concept when thinking about Future You’s finances. Prices go up over time. The 18 months prior to this post have been particularly challenging because inflation was nearing the double-digits. Everyone saw prices increase at a phenomenal rate, while their paycheques were not keeping pace. While a 4% raise is always nice, it can hardly compete with 8% inflation everywhere else.

So while inflation has “slowed” as the economists like to tell us, it’s still around. And it’s not going away. Prices are still going up but they’re simply going up more slowly.

The Book-Ends of the Money Spectrum

As I stated to at the beginning, this post is not for the uber-wealthy. They have lots and lots and lots of extra fat in their budgets. Increases in the prices for groceries, gas, utilities, and shelter will have no impact on their lives. No one will be crying the blues for the wealthy ones.

People at the other end of the spectrum are the ones who are living paycheque-to-paycheque. They work, and they earn, and their paycheques are gone in a heartbeat to pay for the cost of living as soon as they land in the bank. After shelter, food, gas, and bills, the P2P-group has very little, if anything, leftover. These good folks are in a legitimately terrible situation. They’ve already cut out the “little extras” and are still barely making it. I don’t have any good suggestions to easily fix their situations.

The rest of the folks land between these two ends of the spectrum. These are the ones who will either be rich or who will be poor. It all depends on whether they invest some of their disposable income into income-generating assets.

Financial Assets Move You Towards The Wealthy End

I’ve spent many decades reading financial articles, websites, and blogs. The one lesson I’ve learned over all this time is that successfully investing for cashflow takes some time but it pays off in the long-run. I chose dividends and I’ve stuck with dividend-investing since 2011. I’ve made plenty of mistakes and my choices were not perfect. That said, my army of money soldiers will help me to weather inflation’s impact on my future income. My employer is not interested in giving me 7% salary increases every year, no matter who hard I work. Yet, my costs of living will continue to rise as inflation inexorably moves forward. I could get another job, but I really don’t want to.

Instead, I’ll have my dividends do the heavy lifting for me.

Years ago, I set up an automatic dividend re-investment plan, aka: DRIP. As my dividends were paid out each month, I would DRIP them into more dividends. Between the DRIP amount and my regular monthly contributions, I was compounding the number of dividends that I was buying each month. Every dividend that I owned paid me a few cents each month. Naturally, I only earned a few dollars each month when I started in 2011. It was hardly enough to buy a cup of coffee. However, it only took a few years before my dividends were generating $1,000 per month for me. And a few years later, they were generating $2,000 each month.

Believe me when I say that an extra $24K per year is more than a 4% raise from my employer. Thankfully, I was one of the people who lived between the extreme ends of the spectrum. After food, shelter, transportation, and utilities, I had enough money leftover for investing and other things. My choice was to invest before paying for the others things, aka: travel, theatre subscriptions, and whatever other non-necessity happened to catch my eye.

Looking back now, I’m very happy that Young Blue Lobster understood that investing was the only way to stay ahead of inflation. Young Blue Lobster intuitively knew that it was perilous to count on an employer, and that increasing one’s income is the responsibility of the person earning it.

Inflation Will Move You Towards Poverty

If you have the means to do so and you choose not to invest, then you are making the choice to let inflation push you into poverty. What used to be affordable becomes less and less so over time. The fact that you can’t afford something is not going to motivate retailers to drop the price. Waiting for the government to “fix inflation” is not a great move either. It’s best that you assume prices will go up faster than your paycheque will increase. Once that first step has been taken, your next best move is to start investing part of every paycheque for long-term growth.

Your investment portfolio will eventually grow to a sizeable amount, and its annual increase in size will outpace your salary gains, whatever they are. The more you invest and the sooner you invest, the bigger and sooner those gains will be. Other than telling you to win a lottery jackpot, I have no feasible ideas on how to earn big money quickly. What I do know, from personal experience, is that buying into the stock market on a consistent basis for many years and always re-investing the dividends (and capital gains) has meant that my annual income has increased far beyond anything my employer has given me. And since I’m on a DRIP, those increases will continue for as long as I’m alive because of the power of compounding and organic dividend growth.

Never forget that there are many forms of income and your employer only controls your salary. Unless you’re already living paycheque-to-paycheque, you owe it to Future You to invest some of your money. Be proactive. Start slicing the fat from your budget today and investing it wisely so that you, not inflation, control when, where, and how to make adjustments to your budget.

Using a Cash Machine to Fund Your Dreams

This weekend, I happened across a wonderful video about building a cash machine to fund dreams. It was created by a YouTuber that I discovered about 2 months ago. She goes under the handle “The Dividend Dream” and I’ve learned a lot from her videos. The one that I’ve bookmarked in my Favorites folder is the one about how she plans to use her dividends to buy a beach house.

Mind blown! What?!?!?!

Anyway, I want to unpack some of the things she talks about in this video. Feel free to watch the video first or watch it after you’ve read my Sunday afternoon ramblings. Just so you know, I’ve watched her video several times already and plan to watch it a few more times. Her example is one that I hope to follow because I think it’s repeatable for anyone, both on a large scale and a small one. Your mileage may vary.

Poor People Thinking

As explained by the TDD, poor people thinking is to earn, cut expenses, save up money, and use that money to pay off debt. This isn’t a terrible plan. Truthfully, it’s a bajillion times better than staying in debt and paying unlimited amount of interest to creditors over your lifetime.

However, it’s not an optimized plan. Poor people thinking doesn’t allow for the creation and maintenance of a cash machine.

If you watch TDD’s video, you’ll hear her say that she started a brokerage account to save up enough to pay off her mortgage. She doesn’t say how long it took her to save up $425,000, but that doesn’t matter. The point is that she started to save and invest her money in dividend-paying stocks. While she was investing her money, she continued to learn strategies for optimizing her wealth. In other words, she never stopped learning. By the time her mortgage was down to $430,000 and her mortgage-payoff account was up to a balance of $425,000, her MPA was earning $23,677 annually in dividends. Her mortgage payment amount was $22,404.

By this point, TDD realized that her MPA could pay her mortgage payments every month. Eventually, her mortgage would be paid and she would continue to earn $23,677 in dividends every year. In fact, she would earn more than that because she would still be investing money into her MPA thereby earning more dividends.

TDD had transitioned to rich people thinking.

Rich People Thinking

While it’s rarely called by this moniker, rich people thinking is to create a cash machine that will pay for life’s expenses. In TDD’s case, her MPA is a cash machine. It generates enough money to pay for her mortgage every month until her mortgage is gone. When that $430K debt is out of her life, she will still have an intact cash machine that will pay her over $23K in dividends every year.

I’m not suggesting that it’s super-fast to invest enough money to generate $23K every year. Of course not! I’m living proof of that. I started investing 30 years ago, and am only now on the edge of earning $40K per year from my portfolio. I made a lot of mistakes over the years, but mid-5 figures of dividends isn’t to shabby.

However, when I started, it didn’t take very long to earn $18 per month. That’s enough to cover my Netflix bill each month. By the following year, I could’ve covered Netflix and something else***. Go and watch TDD’s video and pay attention to the main lesson: once the cash machine is paying for an expense, it will continue to do so forever.

Your assignment, should you choose to accept it, is to start building your own cash machine. Do not be discouraged by how long it will take! Start with small goals and move up from there. The magic of compound interest takes times to impress. Going from $1 of dividends per month to $2 won’t exactly blow your socks off. That’s just a taste of better things to come. Believe me when I tell you that I was very pleased the first time I earned $1,000 worth of dividends in a month. The first time I earned over $5,000 in a month was even better. And now that my portfolio generates more than a full-time employee earning minimum wage in my province ($15/hr)… well, let’s just say that I do very much believe in the power of my cash machine.

*** In the interests of clarity, I will admit that I didn’t spend my dividends…and I still don’t. Instead, I re-invested them automatically through a dividend re-investment plan. What I do instead is track my annual expenses against my monthly dividend payments. Symbolically, my dividends currently pay for 97% of my current expenses. This is a huge jump from only 4.5 years ago! And I’m still investing a chunk of each paycheque on a monthly basis.

When I retire, my cash machine will cover all of my life’s expenses. If I continue to invest a little bit each month, then it will still continue to grow and kick off even more dividends each year.

Your cash machine can do the same thing for you. All you have to do is feed it consistently by investing a part of every paycheque until its returns are enough to cover your expenses. So go back to the start of this article and watch TDD’s video, then watch it a few more times. Do what TDD and I have done and reap the rewards. You’re welcome!