If you’re interested in becoming wealthy, then your first step is to save money consistently.
It’s one of the pillars of wealth building… and chances are you didn’t need us to tell you.
But what you probably haven’t heard about is the powerful unseen force which takes place when you save money instead of spending it.
This unseen force can help you achieve $1 million dollars relatively early in life.
Understanding this simple concept will literally put you ahead of 99% of other Americans.
The Truth About Money
Here’s how it works…
To 99% of other Americans, $500 dollars is simply $500 dollars you have to spend on clothes, expensive meals, etc. Basically, it’s $500 dollars you will soon be without in exchange for something that will not generate money for you. In our eyes, you are now less wealthy by $500 dollars.
If you are serious about becoming wealthy, then it’s essential to view spent money with the domino effect in mind.
Implementing this way of thinking will transform your idea of spending money for the rest of your life. And your ability to build wealth will increase significantly!
The “Domino Effect” is the idea behind describing how small decisions and actions can end up creating huge impacts over time.
Here is the simplest example of the “Domino Effect” in your daily life. Let’s say you drink two cups of coffee a day. Generally speaking you have three options. You can buy a cup of coffee from Starbucks, use a Keurig K Cup, or use a French Press at home.
You calculate you will drink 730 cups of coffee (365 x 2) over the course of a year, you are able to determine the annual cost of your coffee consumption:
- Fresh Brewed Grande Coffee at Starbucks = $1,423 ($1.95 x 730)
- Keurig K Cup = $401 ($.55 x 730)
- French Press = $255 ($.35 x 730)
As you can see, by simply switching from a daily cup of Starbucks to a Keurig or French Press you can effortlessly save $1000/year.
How To Make Your Money Work For You
The average “investor” is really a trader. They buy stocks or contribute their money into a 401k, TSP, or IRA hoping at some point in the future, it will be worth more than they paid. They’re simply trying to “Buy low and sell high.”
To compound on top of the problem, average investors simply cannot handle the uncertainty of investing. Witnessing the market rise and fall day to day leads to bad decisions. Inevitably, a frantic investor will end up buying high and selling low. After everything is said and done, it’s a lot of stress and research for a payoff that is not guaranteed.
But what if we told you there was an easier way…
Chances are you have a pretty good idea what the total balance of your brokerage account is – even without looking it up. But do you know the annual income your portfolio receives in dividends?
Each share of stock you own is a tiny ownership stake in a business. Therefore, you are essentially part owner… a kind of partner. Every quarter, the company counts its earnings and pays out some portion to its owners (the shareholders). Essentially, your dividend check is your share of the profits.
When you purchase 100 shares of a stock that pays $2 a year in dividends, you’ve just set yourself up to earn $200 a year in income. If you invest the right way, over time that income stream should rise.
You live on your income, not the value of your portfolio. Income allows you to pay your rent/mortgage, provide for your family, or the freedom to take vacations.
Bottom line, getting paid a dividend is exactly what investing is about. You to start building your passive income.
It goes without saying, the future growth potential of the company matters. The company’s assets and resources matter, as well. But at the end of the day, if a stock doesn’t provide a stream of income, then what’s the point?
If you can grasp this simple concept then you’ll likely become a lot more successful and richer as an investor!
The Power of Compounding Dividends
You now know how to spend money in order to acquire businesses which generate income for you.
But how do you compound on this concept to become rich….
You reinvest the dividends you receive quarterly. Instead of taking the income you receive and spending it, use it to acquire even more businesses that generate income for you. This is called the power of compounding dividends.
Imagine this concept as a snowball rolling downhill, as the snowball keeps it gets larger by gathering more snow, which then allows it to gather even more snow. The dividends you reinvest allow you to purchase more shares which lead to you earning even more dividends meaning your income grows even larger.
Compounding dividends are the safest and quickest way to turn a small sum of money into a lot of money. We’re talking about turning tens of thousands into millions of dollars. It’s one of the pillars of wealth building.
An Illustration of Compound Dividend Investing
You place a modest $10,000 into an investment that pays a 5% dividend. Keep in mind your plan to compound these returns over the long term.
In Year 1, a $10,000 investment paying 5% in dividends will pay you $500. You take this money and buy $500 more shares.
In Year 2, your investment has grown to $10,500, but still earns 5%. That year, you’ll earn $525 in dividends… which you can use to buy more shares.
In Year 3, your investment has grown to $11,025, but still earns 5%. At the end of that year, you’ll earn $551.25 in dividends… which you can use to buy more shares.
- 10 years of compounding dividends would grow to $16,289.
- 20 years of compounding dividends would grow to $26,533.
- 30 years of compounding dividends would grow to $43,219.
- 40 years of compounding dividends would grow to $70,400.
These numbers are assuming you don’t add another penny or your investment doesn’t accrue any capital gains.
The power of compounding dividends are obvious for anyone to see. This is why it’s such an important concept for young people to learn, because they have the power of TIME on their side. Imagine if an 18 year old started saving and implementing this strategy!
Are You Going To Continue With Conventional Wisdom?
We understand we have put you in a peculiar situation… a crossroads so to speak.
Right now, you’re basically going to make a decision between pursuing wealth or keeping up with the Joneses.
Do you really need that $500,000 house when the $250,000 house will suit your needs just fine?
These seemingly small life decisions are astronomically huge in regards to building lasting wealth. Choosing to forego certain luxuries while saving $250 here… $100 there… and $1,500 will allow you to accumulate significant wealth over the long term. This is the kind of wealth you can pass down to your children.
Before we move on we want to be clear, we’re not saying don’t spend any money. Far from it. By all means go on vacation, buy your kid’s toys, eat at nice restaurants from time to time. Enjoy your life. We’ve spent money on all these things.
Just simply remember, if you want to be wealthy, then don’t overspend on a consistent basis.
Keep this concept at the forefront of your thinking and you will accumulate wealth far faster than 99% of other Americans.
Where Do We Find Compounding Dividend Companies?
Compound dividend investing is about owning businesses that will pay you.
We’ve highlighted why companies who pay a dividend should be the central focus of your portfolio and investment philosophy. But how do you find these companies?
The best companies pay rising dividends every year and have a long track records of doing so. These are large stable companies who are often well known staples of every household.
In our TSP Strategy we have an entire section devoted to dividends where we show you how to find these types of companies while building your portfolio.