The entire point of achieving financial independence through dividend growth investing is to pay off your living expenses through the dividends your investments return to you on a monthly or quarterly basis.
Let’s look at exactly how we can accomplish this. Let’s go one step further and lay out a plan that will allow us to do so with a high level of motivation and enthusiasm. It’s important to do it this way when achieving financial independence can take more than a decade.
Bills, Bills, Bills
Almost all of us have rent or a mortgage to pay. We also need to eat or we’ll die… so there’s that too. Considering we live in a connected world, there’s also internet and cell phone bills. If you don’t own a car, great for you – because that’s a huge, huge monthly bill when you wind it down – fuel, oil and tire changes, license and registration, wear and tear. There’s also utilities, like water and electricity… And I’m only talking about basic living expenses – you pretty much can’t get by without these things.
In addition to this, people want to live their lives. We also like to go out for dinners, go to the cinema, down liquor, read books, buy new wardrobes.
Good god, it’s like we’re put on this earth to work our entire lives so that we can pay bills. And we’re expected to to live like this? And keep our mouths shut? Especially while the government effectively steals a large portion of our pay to redistribute.
I have to say one of, if not the greatest motivators for me is seeing how my dividends cover my monthly bills and how close I am to being financially independent with every single investment. It’s incredibly liberating to be making investments and every time seeing your required cost of living from paychecks being reduced.
Step One: Covering your Necessities
The first step to laying this all out for yourself is to know your exact monthly bills. Write them all down in a spreadsheet. Here, let’s do it together.
To keep motivated, it’s better to start off only look at covering necessities through dividends since it will become more complicated and seem more difficult as more bills are to be paid through dividends. By doing it this way we are raising our morale, which is important for such a long, arduous journey.
In eastern Canada, the below could be a reasonable example budget.
This could be considered a reasonable (necessities) budget for someone in their late 20s. It does not include many things that we do without (except perhaps if money was tight one would first reduce their optional subscriptions). The rest are practically mandatory to participate in society and be a healthy individual.
Quick Math: With annual necessity expenses of roughly $23,000 – it would require a dividend portfolio worth $575,000 yielding 4.0% to cover all costs. Alternatively, a $460,000 dividend portfolio yielding 5.0% could also cover $23,000 in annual expenses.
If it would help anyone, I’d tell them to call themselves “Cell Phone Financially Independent”, or “Auto Financially Independent” if you have such things already covered through passive income. Try to knock down one sector of your expenses at a time.
Step Two: Luxuries or Nice-To-Haves
Of course we need to have our joys, hobbies, activities – whatever you want to call it – to live a nice life. Now this part varies widely from person to person; family to family so it’s really up to the individual’s discretion.
Activities like dining out at restaurants, going to the cinema, joining a karate class – all require money (like everything else, right?). Some people might enjoy these things while some may prefer to go boating, fishing, sky diving, etc. This list can go on forever – but the point is – compile your own list and determine what you spend on a yearly and monthly basis and then analyze the costs and weigh them against the hours you need to put in at your job to earn the money to invest to receive the dividends that will cover it.
Here’s an example luxury budget. It’s far from what some may call luxurious, but for this exercise anything not considered necessary we categorize as luxury.
These numbers may tend to fluctuate widely. For instance, gift-giving events may occur for a series of months. Since one may spend frequently on gifts, I’d recommend setting a yearly budget and extending it out on a monthly basis so that the cost evens itself out throughout the year. This is the same thing with auto repairs and such.
Quick Math: With annual luxury expenses of roughly $10,000 – it would require a dividend portfolio worth $250,000 yielding 4.0% to cover all costs. Alternatively, a $200,000 dividend portfolio yielding 5.0% could also cover $10,000 in annual expenses.
The Complete Budget
If we combine the necessities and luxuries budgets, it adds up to a total cost of $2,650 per month. This equates to about $31,800 per year. Now let’s compute the value of a dividend portfolio required to passively cover all of these costs.
With total annual expenses of roughly $31,800 – it would require a dividend portfolio worth $795,000 yielding 4.0% to cover all costs. Alternatively, a $636,000 dividend portfolio yielding 5.0% could also cover $10,000 in annual expenses.
Step Three: Reduce Your Spending
We just added up our necessities and effectively realized our “necessity number” – the amount of cash dividends we’ll need to cover our required expenses for basic survival.
Among those things we have auto insurance, cell phone, etc. – and these are very often much higher than they need to be. Shop around for deals on these as you can usually undercut your current provider.
Example: Some years ago I reduced my monthly auto insurance by over 50%. I was insured with one auto insurer which tracks your driving and penalizes your cost for going even 1km over the speed limit, despite the speed and flow of traffic, and I was paying around $60 – $80 a month to insure an early 2000s Honda Civic. I got a letter from another auto insurer to check out their auto insurance; and they offered a quote online of $25, I then called them and in less than an hour I saved over $500 a year.
That’s a $500 return in only one hour, and only one or two phone calls. As you can see, it’s not complicated to spend one day or a couple per day for a week to get much better deals than you’re currently paying.
By reducing your monthly necessities, you reduce the amount of dividends you need to accumulate and you reduce the total portfolio value you require to survive – knocking off months or years of your required working time. Considering I save roughly $500 from my auto insurance swap, that’s a $42 per month saving. To achieve $500 in annual dividends for an investment at 4% would require $12,500 in capital. Depending on how much you save, that could shave off more than a year of working to passively cover the cost.
Step Four: Revisit and Adjust These Costs on a Consistent Basis
This is a pretty simple one. Just revisit your budget, your investment portfolio, your dividend income, etc. either monthly, quarterly, semi-annually or annually. Whatever piques your fancy. I recommend doing so as often as you can stand without getting frustrated, because the more it’s in your face, the more it will hit you and make you want to do and be the best you can.
I’m sure we could have added steps in between these, but for the time being I don’t see any point really. I want to create a series of simple lessons that any layman could follow, more in-depth detail will come in due time.
So remember, a monthly budget is super important and a requirement to paying all of your bills with dividends. That’s the starting point.
From there, try to figure out what sort of investment portfolio you’ll need to cover all of your necessities. At that point, you’d consider yourself financially independent. You don’t need to work to survive. Your passive income will cover your personal expenses.
Of course, that’s a tough life to live to just get by – so we need to also calculate the types of investments we’ll need to cover our luxury / hobby expenses. Once you have those covered as well, you can consider early retirement; the second coin head to financial independence; a lofty goal.
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