If you are in your 20s or even 30s and reading this article, you are well ahead of the power curve. You just have to keep your eye on the prize and “don’t fumble the bag.”
I say this because you have time on your side. The main element of the power of compounding is time. Compounding is the interest from interest accumulating interest. In this case, the dividends from your dividends stocks earn more dividends.
I call this creating infinite dividends, and as a young person, you’ll have 50-80 years of compounding to let your dividend income stream grow. Fascinating stuff, but let’s start from the beginning.
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Avoid the most dangerous pitfalls. The greatest trap you need to avoid as a youth is FOMO or Fear of Missing Out. You are at that age where you may want to be part of the “cool crowd” or “in the know-it-all club.”
The stock market has a lot of similarities to the cryptocurrency markets. In 2021, meme stocks like AMC and Gamestop took over the mainstream media. Retail traders attempted to overtake “the man” by rallying together.
Avoid all of this nonsense. As I wrote in “Multi-Generational Investing,” the things that made people rich yesterday will make people wealthy today. This saying means to focus on dividends.
Your goals in your 20s. Your first goal is to avoid all things FOMO. If you are getting investing tips from YouTubers with large followings or Reddit threads, STOP.
Here is how I envision investing. Let’s say you buy 50 shares of Gamestop at $5/share (total of $250). The price then moves to $250/share (total of $12,500). You sell everything for a $12,000 profit.
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Now, you have to move on to the next significant investment. If you are only 25 years old, that’s another 60+ years of playing this game of insanity. It is futile to chase capital gains consistently. However, there is a better way.
Your second goal is to focus on dividend investing. Dividends have been making people wealthy for hundreds of years, so you may as well join the party.
Dividends aren’t sexy to talk about but addicting to spend. The best part of dividend investing is using them today. Yes, I go against conventional wisdom when I say use your dividends today, but listen to my reasoning.
What gets rewarded gets repeated. It is far more conceivable to use your dividends now than collect them for 50+ years before using them. This is why many people don’t invest in their Roth IRAs or 401K plans.
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The idea of using your dividends when you turn 60 years old while you can’t afford a tank of gas today is appalling. Let’s stop the madness and use our dividends today.
Over time, you’ll become addicted to growing your income stream. You’ll look into more ways to add to your cash pile; thus, you’ll research things like real estate and starting a business. That’s the magic of passive income.
A quick example. I recently had a sinus infection, so I went to the store on base. I wanted to buy some vitamin C chewables. Wow, it cost $15 for a jar of them. I spent a total of $21.28 at the store.
I honestly didn’t want to buy them, but I had $40 on my Dividend Debit Card. So I went ahead and bought them. I knew I would receive $30 from AGNC and $40 for Altria in the next couple of days.
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Do you see how I am creating a wealth mindset by growing my income? I am not spending on frivolous things, but I can also purchase items without guilt.
I wish everyone could have this feeling of stress freedom. However, it comes only by educating yourself in dividend investing and passive income.
Getting started. Okay, now where do you start dividend investing in your 20s? I wrote an article titled “Your First Five Dividend Stocks” that will walk you through how to build your starter dividend portfolio.
You also want to set small goals along the way. You want to use dividends to replace spending in other places slowly. For example, you can start with using dividends to purchase a meal at Applebee’s ($20).
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Next, you may want to use dividends for your monthly dining out budget ($100). By doing this, you focus on converting your earned income into passive income.
Plan for the unknown. It’s tough in your 20s to imagine life in your 30s and 40s. The main reason is that you haven’t found your partner yet.
However, finding someone with similar money habits is much easier if you understand how to build wealth. Therefore, you want to keep growing your dividend income along the way.
Trust me; I wish I had a $1,000/month dividend income stream as I entered my marriage in 2006. This income stream will continue to grow over the years, even if I don’t add additional income.
The Magic of Leverage
As a single person, look towards creating a passive dividend income stream as soon as possible. The American dream truly is expensive, so you’ll need tools in place to help overcome the financial burden.
Three dividend pies. I divide my dividend investing into three pies: index funds, dividend growth, and income investing.
Each pie has its purpose. Index funds are for generational wealth. Dividend growth investing is for retirement planning, and income investing is for creating paychecks today.
Because I will have a nice military pension and own three homes, I can focus mainly on income investing. As a young person, your investing habits may differ from mine and other people’s. Your portfolio allocations are genuinely up to you.
For example, if you had $500/month to spend on stocks, you may choose an aggressive allocation. You could say $50 for index funds, $100 for DGI stocks, and $350 for income investing.
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Luckily, I can do this automatically through M1 Finance and their pie system. I invest $600/month into my M1 Finance, with $50 to DGI, $50 to bonds, and $500 to income investing.
Conclusion. Avoid FOMO at all costs. Keep reading books and articles from authors you trust on Seeking Alpha. Don’t worry about price movements in the market; only building income streams.
Use your dividends today. They will help you build the proper money habits for tomorrow. It’s unrealistic to save your dividends for 50 years as you struggle today. Eventually, you will have the urge to build more passive income, but it starts with buying a $5 ice cream today.
The Magic of Averaging Down
Once you invest in your first five dividend stocks, you’ll become more advanced. You’ll want to focus on long-term, medium-term, and short-term dividend income streams. Income investing is a paycheck for today.
Start preparing your income streams before your eventual marriage or partnership. Will you or your spouse stay home? How much income would they need to survive without a job? Having a $1,000/month income stream is life-changing.
Above all, don’t overthink dividend investing. Your goal isn’t to beat the market; it’s to improve your quality of life. As long as your dividends keep coming in, you’ll enjoy an extraordinary life. Good Luck!
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