I’ve said it once, and I’ll say it again, “Your 30s are the most financially challenging decade of your life.” Therefore, if you can keep it together in these years, you’ll stand a decent shot of winning in the end.
I started investing at the ripe old age of 38—much later than I should have. I knew nothing of the stock market, dividends, and capital gains until 20 years into my military career.
Luckily, I had the foresight to reverse course completely and get my financial house in order. Today, I want to give you the heartache of changing course in your late 30s. Instead, we can begin our 30s already on the right track.
Happiness Isn’t Free 3
Welcome back to the Stock Market Investing series (20s), where we get on the right track early and often. Now, let’s start making some assumptions.
Always start with income investing. The most essential part of your stock market portfolio is income investing. For this series, we assume that our allocation toward income investing will match our age. For example, if we are 35, our income portfolio would be 35%.
Why is income so important? Would you go to work if they didn’t pay you? Of course not. Why invest in companies if their stocks don’t pay you?
Income investing involves searching for and purchasing products that pay current income. This philosophy differs from dividend growth investing, which seeks future income growth and share price appreciation.
Becoming an income investor is extremely vital to surviving your 30s. Money was one thing I did not have enough of in my 30s.
Treasury Bills vs. Treasury Notes vs. Treasury Bonds
Income investing in your 30s. The best part of income investing is that you can use the money now or later. You purchase stocks to receive a paycheck—that you can then use.
Let’s say you saved $20,000 in a high-yield savings account that earns 4%. That account would pay you $800/year or $66/month.
Instead, let’s invest that $20,000 in a PIMCO Dynamic Fund (PDI), which is a closed-end fund that specializes in bonds. Yielding 12%, you would receive $2,400/year or $200/month. Could you use an extra $200 per month?
The magic of income investing is that you invest for the sole purpose of receiving a paycheck. You don’t have to predict the future; you just have to collect income.
Looking back at my 30s, I could have used an extra $200 per month. In fact, I used credit cards to help make purchases back then. You can do better by learning the ropes of income investing.
Income for Retirement: High-Yield Dividend Stocks
Rich people become richer by using income from their assets to purchase more assets. The average person uses debt to buy liabilities.
So, the rich person collects 12% of the interest from PIMCO and makes purchases. The average person pays 12% interest on their credit card to make purchases. Do you see the difference?
Building the rest of your portfolio. As much as I love income investing, it can’t be the only trick up your sleeve. The other allocations go to speculation, growth, and dividend growth investing.
Speculation is when you invest without knowing the return on investment. In other words, you are guessing, hoping, and praying for an outcome.
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You can speculate with cryptocurrencies and young stocks after their initial public offering. I would limit speculation to 5% of my portfolio in your 30s; too much is going on to squander money through these years.
The growth of index funds. The best way to predict and invest in growth is through index funds. We know that on average the stock market grows 8-10%%
You can capture this growth for yourself and your family by purchasing several index funds. I recommend dedicating 30% of your portfolio to index funds such as the Nasdaq 100 (QQQ), Total Stock Market (VTI), S&P 500 (SPY), and Dow Jones Industrial (DIA).
The plan is to never sell shares of our index funds, but they are good to level out our portfolios. Index funds help our portfolios grow even when other areas are struggling, such as fixed income and speculation.
Income for Retirement: Business Development Companies
Grow your income organically? As an income investor, the main way to grow your paycheck is to reinvest a portion of your dividends; I recommend 25%.
Conversely, dividend growth investors receive organic dividend growth through corporations raising their payments.
Think of dividend growth investing as a combination of index funds and income investing. Its four principles are: 1) share price appreciation, 2) dollar-cost averaging, 3) dividend reinvestment, and 4) dividend raises.
There are several different ways to think of dividend growth investing. One way is to imagine paying off your home over 30 years and funneling that cash flow back into your lifestyle.
Reinvesting all dividends throughout the years is the best way to leverage the four dividend growth investing principles.
That’s why dividend growth investing is challenging throughout your 30s—you’ll need to lock the money in your accounts.
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If you do the math, dividend growth investing should represent 30% of your portfolio. That’s a lot of money you can’t access immediately, but it is necessary.
Some great dividend growth stocks are McDonald’s (MCD), Starbucks (SBUX), and Walmart (WMT). Search for dividend aristocrats to start your journey.
Putting it all together. As you can see, the only money you should be able to access is from your income investing portfolio.
I know it’s tough to lock up 70% of your money for the future, but I can’t stress how important it is to do so.
My wife and I retired at ages 39 and 42, respectively. Yes, receiving a military pension was a significant factor. However, most military retirees must start a second career.
Income for Retirement: Dividend ETFs
We used the magic of income investing to generate $2,200 in dividends. This money can be used to reinvest in more income, spend on ourselves, treat our families, or invest in other asset classes (like businesses).
You’ll be dealing with a lot in your 30s: stressful jobs, raising kids, handling parents, buying homes, etc. You’ll need income.
Money can solve all problems outside of relationships. However, your budget is more critical than your stock market portfolio.
Now is a good time to take account of your food and entertainment budgets, as these are the cash flows that mostly escape reconciliation.
Conclusion. You don’t need to build a massive stock market portfolio in your 30s; you’ll only need to take the process seriously.
The Dividend Debit Card 3
Get the money into the stock market, and the magic of compounding interest will do the rest. I wish I had known that sooner.
I’m not a huge fan of 401 (k)s, but I’ll save my commentary on that for a later day. However, starting your own brokerage account sooner rather than later is wise.
You’ll need to learn terms such as the Federal Funds Rate, money market funds, dividend yield, and dividend growth rate. These will help you make the right investment decisions for your family’s future.
Investing all your money in a 401 (k) might prevent you from learning the principles of stock market investing. I know because I did just that for 20 years.
I have learned more about myself over the last five years than in the previous 20. Stock market investing and income investing are for everyone. You just need to know where to look. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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