It’s time to pay your bills. The standard practice is to receive your paycheck and pay your highest-ranking, most urgent bills first.
What if we could change the process entirely? What if we could pay all of our bills with dividends? Once we can pay your expenses with dividends, we are incredibly close to becoming financially independent.
What is financial independence? Financial independence is having the ability to pay for all of your expenses and budget items with passive income.
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Let’s say your household budget is $6,000/month, you become financially independent when you earn $6,001/month in passive income.
Obviously, the lower your budget for expenses, the faster you can leave the workforce. The question is, how much are you willing to cut?
The good part is that you don’t have to pay all your bills at once to begin filling the freedom of passive income. In fact, I recommend slowly replacing your bill payments with dividends.
Replacing your paycheck with dividends. Let’s start with your electricity bill. Outside of your mortgage, paying your electricity is the highest priority.
The first step is to lower your electricity bill as much as possible. Because of the size of my house, my bill is around $333.
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I have six people in the house, all of whom use a lot of power to power their computers, internet, TVs, and cell phone chargers. I expect to pay this much for a 2,500-square-foot home.
I track every single bill on a payment spreadsheet to ensure these companies don’t get over on me. I don’t trust them as far as I can throw them.
Once your electric bill is in perfect condition, you must decide which form of passive income you will use to pay it. In this case, we will use closed-end funds.
What are closed-end funds? Closed-end funds (CEFs) are securities that trade on the stock market. They are similar to exchange-traded funds, except that they have a set share amount.
CEFs use leverage to generate higher income returns than most ETFs. I like to invest in CEFs that pay over 10% yields, sometimes 15%.
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Most of the CEFs I invest in pay monthly dividends, which is key for paying our monthly electric bill. Some of my favorite CEFs (and current yields) are PDI (14%), PDO (11%), PTY (11%), ECC (18%), OXLC (18%), and XLFT (16%).
For today’s case, we will use my favorite closed-end fund, PIMCO Dynamic Income Fund (PDI), which currently yields 14%. First, we review the numbers.
How much do you need to invest? The first step is determining the annual income we need to cover our electricity bill. We can do this by multiplying $333 by 12 months to get $3,996, which we will round to $4,000.
The next part can be tricky, so pay close attention. Now, we must find how much we must invest in PDI at a 14% yield to earn $4,000 in annual dividends.
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You get this number by dividing $4,000 by the yield of 0.14, which is $28,571. Wow. Make no mistake: $28,571 is a lot of money to most Americans.
Let’s take a quick detour to consider the value of income investing with closed-end funds. If we exchange PDI for a great dividend stock like Pepsi (PEP), our numbers will differ entirely.
Pepsi currently yields 4%, its highest yield in a decade. To receive $4,000 in annual dividends from Pepsi, we would need to invest $100,000.
We can see that we need to invest almost $70,000 more in Pepsi to reach our financial destination. Income investing is key to pushing your income faster than standard stocks and bonds.
Saving and investing $30,000. Now for the most challenging part of all—saving and investing $30,000. Can you do it? Yes, I am sure you can accomplish this in stride.
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It’s time to examine our overall budget. Our food and entertainment budgets wreak the most havoc on our cash flow, so let’s start there.
How much money do you spend on food every month? Do you separate home-cooked meals from restaurant food? Do you cook at home?
Most people probably overspend on food by 100%. My family of five spends $800 per month on food. We also have a roommate, but she purchases her own supplies.
Review your food spending for one month, and start by cutting those numbers in half. If you need more, add more back, but do it intentionally.
Now, review your entertainment budget. Do you spend on a whim? Do you have a set monthly amount for Starbucks or video games?
My wife and I each receive $750 monthly in personal entertainment spending. This is our guilt-free money.
This budget allows us to control our personal spending and save and invest over $4,000 per month in our income-investing portfolio.
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Going the distance. I bet you can find an “extra” $1,000 monthly in cash flow to put toward your closed-end fund. Let’s say you also generate another $1,000 by getting a roommate, driving Uber, or doing consulting work.
At $2,000 per month, you will complete your mission in 2.5 years, which is an amazing time. But in reality, you will do much sooner than that.
My wife and I started with $1,000 in a brokerage account in June 2019 and reached $30,000 in May 2020—about one year.
Remember that your CEFs will start generating 14% annual yields from the first purchase, so you can immediately harness the power of compounding.
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However, the most important compounding will be happening in your brain. As you see the world through the “lens of income,” you’ll begin making essential spending decisions.
For example, you may want to go to a concert that costs $4,000. However, you now understand that you can earn $46 in monthly dividends for the rest of your life instead.
More importantly, once you have $333 in monthly dividends, you can divert it to save $4,000 in one year. You can use this money for your concert, electricity bill, or to upgrade to hardwood floors; it’s your money.
Conclusion. You can save and invest $30,000 in one year when you focus your efforts. This is especially true if you have no debt or high car payments.
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Everything in your financial life works together. The three stages of wealth are debt, saving, and investing. Therefore, ideally, you would have zero debt, $20,000 in savings, and $400,000 in investing (for example).
By taking on this challenge, you are moving into the final stage of wealth. Investing will take you on a magical financial journey that will allow you to see the world differently.
It’s funny; the more money I make from dividends, the more I want to make—every purchase is a choice between today (enjoyment) and tomorrow (investing).
My wife and I earn $2,400/month in dividends, which allows us to pay all of our household bills with passive income. Becoming financially independent is a fantastic feeling, and I hope you also can feel it one day. 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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