Have you ever wondered how to get ahead in you financial life? Does it feel like you work hard for your salary just to see a close to zero balance at the end of each month again? It can be quite frustrating to feel so, but the good news is that you can change it. By implementing a few changes in your life, you can develop your own financial engine that keeps on moving you ahead even when you are sleeping. Let me show you what I mean!
Our starting point is the following. You get your salary and it immediately starts to flow towards your expenses. Something like the below picture:
You pay your mortgage, do your grocery shopping, utility bills are debited from your bank account, you might have a kid so you have to spend on childcare etc. Besides of your salary income, all you have is expenses. Your financial engine does not have enough fuel to start. This is not gonna get any better like this.
But what happens when we add a little extra to the above figure? Like saving, or more like an invested saving?
What do we see here? Besides of all the expenses we had before, saving appears. This can be either achieved by less spending (e.g. cooking more at home instead of eating out) or more income. In this example the savings are invested into dividend paying stocks.
From the first moment you do this, things get moving. The stocks you purchased will pay you dividends which you can reinvest, so you will get paid more and more. Notice the green arrows between the dividends and the savings. They form a kind of circle and this will start moving your financial life ahead. Over the years the compounding effect will be more and more visible. Of course you can (and should) speed up the process by continuously adding some extra fuel in the form of regular savings. This is the best way to start rolling your dividend snowball.
Do you want to see a real life example? As already shown in our June 2017 financial overview, our quarterly dividend income just keeps on increasing ever since I started this strategy.
Please also note that by adding this extra source of income and starting our financial engine, some exhaust gas also appears in the form of taxes…
The reason why I love dividend stocks is that sometimes you really do not need to do anything to increase your income. Stable and growing companies do increase their dividend payments on a regular basis. Some keep on doing it for over 100 years. And this is all irrespective from the temporary moves of the share price.
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The above kind of method can nicely boost your income over the time. You just have to be patient. As Warren Buffett said, “You can’t produce a baby in one month by getting nine women pregnant”. But how about improving our engine a bit?
This question is really actual for us as we are about to get our first rental property very soon.
As you can see, things are getting a bit more complex. Having a rental property does not only mean a new source of income, but also a lot of new expense that you did not have before. In an optimal way, these can be all covered from the rental income. Anything that is left, can be put to the saving bracket and reinvested.
Please note that everything in this financial map is linked. Putting extra money in the rental (if used as an extra principal payment) will reduce the future mortgage payments and increase the money to be reinvested. Will you spend more by buying a new car? That will decrease your savings. If you regularly make a budget, that will greatly assist you in optimizing your financial engine. Consider reviewing your finances regularly, just like you take your car for a periodic technical inspection.
Now you already have two power sources that run your financial engine. This is also good due to diversification. If one asset class is having a bad time, the other can still compensate. Of course you can think about adding even more power sources. Add some bonds to your savings. Start a side hustle. Sell your old stuff that you don’t use anymore. The possibilities are endless and the only burden is yourself (and the law; don’t trade with drugs :))
After a number of years you will get to the point when your non salary related income will cover your expenses. From that point of time, being employed will be optional. You have built a self running machine!
Sounds futuristic? So did self driving cars sound like when the first Ford Model T has rolled off the assembly line. It took time, but we all can manage to create things that seem unimaginable at the beginning.
The great thing is that even if your salary income is taken out of the picture, if you leave enough buffer, the income generated by your investments will not only cover your expenses, but also produce extra income which can be still reinvested. May we call it as a perpetual motion machine…?
So tell me: Is your financial engine already started? If no, what are you still waiting for?
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Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on financial independence and early retirement.