This site has a new, clear focus.
To solve one problem:
How to get more freedom in your life with passive income.
That’s the purpose of this site and my business.
Now, there are a few ways to earn passive income, but the one I’m focusing on for now is dividend growth investing.
If you’re new here (or you didn’t know), I have been building and growing a portfolio of stocks that pay me dividends.
My money is growing and I’m earning hundreds of $$$ a month in dividends – check out my latest dividend payments.
I’ve also spent months creating a course that teaches you everything you need to know to get started. It’s called Freedom with Dividends.
But that’s a story for another day…
3 Steps to Make Your Money Grow & Earn Passive Income
Onto the meat of the article!
I wanna give you a little overview of the process – like a bird’s-eye view.
You can either read it or watch it in video form below:
Step #1: Save
The first step sounds simple, but so many people are terrible at it.
Most people I know save very little money – or nothing at all. And the statistics back this up…
According to the Bureau of Economic Analysis, the average American saves less than 5%.
That ain’t gonna cut it!
To really experience the amazing money-growing power of the stock market, you need to save way more than that. After all, your savings rate is all that really matters.
So how can you save more?
Well, at risk of sounding obvious, this is the equation that you need to look at:
Savings = Income – Expenses
To save more, you need to shift the formula by doing one of 3 things:
- Earn more (get a promotion, start a side hustle)
- Spend less
- Do a bit of both!
The latter is probably the best way to do it. 😉
One thing that’s gonna help you is to master delayed gratification.
This basically consists of growing the mental power to wait until later to have this gratification – or pleasure.
A great analogy is being on a diet.
You know you shouldn’t be eating that yummy-looking bowl of chips. But you have 2 choices:
- Eat the chips and experience momentary pleasure – at the expense of your progress and future happiness
- Endure the desire and choose not to eat the chips – you’ll feel much greater happiness later when you’re on track to lose fat!
It’s the same with money.
A lot of expenses only bring momentary happiness, but you could delay this pleasure by investing this money and letting it multiply over the coming years.
Now, once you start getting your savings up, you need to tackle a few things:
Kill Your Debt
If you have debt with a high-interest rate, you should not be investing. You’re not ready.
For example, if you have saved an extra $1,000 this month and you’re debating whether to invest it or pay off your debt, ask yourself this:
Is the interest on my debt higher than 8%?
8% is the historical average stock market returns. If your debt has an interest rate higher than that, you’ll be better off paying it first.
Create an Emergency Fund
When you invest, you need to make sure that you don’t touch it for a few years.
This is incredibly important (more in Step 2…).
To help you do that, you should have some money saved up that you don’t do anything with. Just have it in a bank account, immediately accessible.
You should aim to have at least 3 month’s worth of expenses there. But 6 is better!
This will be a lifesaver when your boiler breaks or you’re forced to dish out a few hundred bucks on a car repair.
Step #2: Invest in Dividend Growth Stocks
What are dividend growth stocks?
Basically money-making machines! 😍
They are companies that are large, stable, and they love to reward their shareholders by paying them ever-increasing dividends.
When you buy shares in one of these companies, you become a shareholder and you’re entitled to their dividends.
I’ve been doing this since 2014 and I’ve now got to the point where I’m earning an average of over $900 each month.
Let me tell you what to look for in one of these stocks…
At Least 10 Years of Consecutive Dividend Increases
I look for stocks that have been increasing their dividends for more than 10 years consecutively.
That’s a great sign that the company’s management is committed to paying dividends. It’s also a great filter because this is damn hard to do!
Only the best of best can achieve this.
Here are a few examples of the kinds of companies I’m talking about:
You probably use some of the products that these companies produce most days – even if you don’t realize it!
And they have all been increasing the dividends they pay for decades. Longer than most of you reading this have been alive on this Earth!
Dividend Yield Above 2.5%
The next thing we’re looking for is whether these stocks pay enough dividends!
It would be easy to keep increasing a dividend that was only 1 cent to begin with! 😉
That’s why I recommend that the minimum yield should be 2.5%.
Preferably higher, as long as it’s under 10% – that’s where it starts getting silly and is known as a yield trap…
A Competitive Advantage
Paying a great dividend isn’t enough.
You wanna ensure that these companies will make great use of your money and keep growing. That’s what’s gonna make your money grow!
So you need to make sure that the company you’re trusting your money with is a leader in its field. It should have some sort of competitive advantage that keeps it at the top for decades to come.
A Fair Price
Even the best stock can make a bad investment if you pay too much for it.
It’s a saying that is very, very true. An investment only makes sense if you’re paying a good price for it.
Would you buy an apple for $2 when you knew it was only worth $1.5?
It’s the same here. You need to work out the maximum price that you’re willing to pay.
If you do pay a good price, you’re almost guaranteed great returns in the long run.
Happy days! 🙂
Step#3: Give it Time!
This is the easiest step, but the one that people have the biggest trouble with.
You have to wait. Do nothing. Let the companies you’ve invested in do their thing!
Take it eeeeeeasy.
If you give them enough time, you’ll overcome the high risk of short-term investing (AKA trading… eugh!).
Check this out:
The first year is crazy – the line isn’t even in view. You could win big or you could ruin yourself.
It’s pretty much random chance. Not what we want!
You’ll notice that after 5 years, we’re at a 20% chance of making a loss. And remember, you only really materialize your wins or losses if you sell your stocks!
But here’s the truly awesome part…
After 20 years, it’s literally impossible to lose money!
Even if you bought the worst stocks, at the worst time possible. You’d still be making a profit.
Now, this is taking into account over 140 years of US stock market data. I’d say that’s a pretty spectacular amount of data points!! 😉
BONUS: Step #4: Financial Independence
“Whaaaat? But Ricard, you said there were 3 steps!”
Yeah, I did… But I have an optional one for you.
If you do this long enough…
If you consistently save a large part of your income…
And you invest it into stocks of great businesses…
And you’re patient (especially when things get tough)…
Then it’s only a matter of time before you reach financial independence. Check out this nifty graph I made:
Do you see that cross-over point where the orange line crosses the yellow line?
That’s the point where your passive income from dividends surpasses your expenses – financial independence.
That’s when you never have to work for money again – unless you want to!
That’s the point where you’re truly free to do the things you love. The things that make you happy and make the world a better place.
I’m well on my way there.
I can cover around 50% of my expenses with the dividends that I earn. It’s amazing.
At this rate, I’ll be 100% free by the time I’m 35.
How To Get Started
Do you want to make your money grow and earn passive income? And one day reach financial independence?
Then I have something for you. A free email course that will show you how to get started with passive income and dividend growth investing.
This can be the start of your journey to financial awesomeness and freedom!
All you have to do is reach out…
…and take it.
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Financially Free says
Nice post. Have you ever considered Crowdlending as a part of your portfolio?
Most platforms pay monthly interest, it’s a great way to build passive income.
Jerry Stevens says
I live and die by the idea of emergency fund. People say you need to have 6 months of your income stashed in a liquid state in a savings account, but I say make it 10. In today;s volatile world where you never know what can happen – even if you have health and motor insurance – a bucket that you can dip your hand into in times of crises is absolutely essential.
It might not grow your money per se, but it will definitely prevent you from using up money that would have otherwise been good invested.