If you are one of those people who think that they are living paycheck to paycheck, welcome to the club! The truth is that most people in the US live paycheck to paycheck, and without a plan and/or intentionality, it is hard to break that cycle.
One way to break the paycheck to paycheck cycle is to have passive income. Passive income is, in simple terms, income that you make with very little initial work and that keeps on giving you money continuously. Sounds too good to be true? Read on!
It takes time to build enough passive income, for example, to quit a job or to have enough to live off of. However, even if you just start making $10.00 a month with a few investments, it is $10.00 more that you earned, on your own terms. One way to have passive income is to get dividends.
In this post we will explain what dividends are, and how they work. More importantly, we will explain how dividends can help you start building passive income, that will work for you.
Passive income is risky (like any other investment) it is not guaranteed, and it can be frustrating at times. But with enough discipline, anyone can build passive income little by little to add to their overall wealth. Let’s get started!
Dividends, what are they?
Dividends are complex, but let’s skip all the technicalities for now and explain them in a simple way: A dividend is simply a small fee a company pays you in return for you investing money on that company. Makes sense? You invest money on a company (let’s say $500.00) and that company will pay you dividends (let’s say 3%) because they use your money to help grow their business. Not all companies pay dividends, and there is the key to success in building passive income. You need to start to invest on companies that pay dividends.
How do I start?
First, if you are living paycheck to paycheck and it is hard to save money to invest, I suggest that you start with a budget. After you get your current income under control (telling every dollar you make what to do) then make sure you pay all your debt. We have a great article that explains why it is better to pay debt (like high percentage credit cards, if you have some) first before you invest anything. Click HERE TO READ.
Second, when you have some money saved and no debt, you are ready to invest. We at Saving For Hope recommend that you invest money on a ROTH IRA, or a ROTH 401K first. Maximize those the best you can to start. After that, you can have fun!
Third, open an investment account. You can do that with a ton of companies these days. Some banks even offer investment platforms that you can take advantage of with very little money down. But when finding an investment platform, the more important issue is to pay attention to the fees. A good range is between $4.00 to $6.00 per transaction. Try to stay on that range. There are some companies that will let you do several transactions for free when you start. Take advantage of that offer if you can.
Fourth, find good companies to invest. The key to dividends is to find companies that are financially solid. Now, experts use all kinds of number and metrics to see if a company is financially stable, growing, and healthy enough to be there for years to come. It can get very complicated. However, if you are simple minded like I am, use the experts’ knowledge as a guide to find a few solid companies to start. Read and learn from them. A good place to start: fool.com. thy have a bunch of experts that share their knowledge for free. (BTW: we don’t make any money from them, we just think they are a good source of information).
What are dividends good for?
Dividends are good for creating passive income. They will generate money for you as long as you have the money invested on the company and the company is doing well. Here are Saving For Hope’s recommendations for you to help you break the paycheck to paycheck cycle:
- Make sure the companies you are looking at have a good history. Read about them and get to know what they do and how they do it.
- Find companies that pay dividends ranging from 3% to 6% (above average dividend yield). Anything higher than that, could be problematic in the long run. Remember, a company can change the dividend as they see fit without warning. Beware of companies that pay more than 10%, because that can be hard to sustain in the long hall.
- Invest your money on different markets. Find companies that are different from each other. For example, don’t invest on 5 companies that “make coffee”. Because if the coffee market collapses, so your overall investment will. But if you invest on companies that are different from each other (different markets) if one goes down, the other ones will stay the same or even go up to minimize your risk. There are 21 different markets to invest, so make sure you divide your money on at least 10 of those markets. For example, real state, energy, and retail, etc. It is not that complicated, just don’t put all your money on companies that do the same thing, and you will be ok. Experts suggest not to have more than 20% of your money on one market.
- Don’t panic if a company you invested on is not doing well. Companies go up and down all the time. Just have patience.
- Keep investing, little by little. If you start with $100.00 keep at it and save some more and invest some more. The more you do it, the more money you will make every month. Remember, some companies pay dividends every month and some pay every quarter.
- Learn more and more! Period. Stay at it, and you will see how you will start learning more and more, picking better companies and increasing your monthly income.
Investing to create passive income with dividends does not have to be complicated. You don’t have to be an expert, and you don’t have to have an advanced degree on economics, or business to be successful. Click To Tweet All you need is a little research, patience and diversification. You can start investing with as little as $50.00 and build from there. Start small and stay at it!
Finally, we will say that dividends should not be your only long-term plan. Income from dividends is just one idea of one component for solid financial plan. They can have long term effects on your family’s wealth. If you are like me, you will like the thrill of finding a good company, learning what they do, investing some money on it, and seeing how they pay you every month. Break that paycheck to paycheck cycle! Enjoy!