One of the foundations that we have built our website on is the importance of investing in dividend paying stocks at a young age to maximize the power of compounding dividends. That’s why we have preached frugal living as it has allowed us to maximize the amount we are able to invest now so we can reach financial freedom sooner. While we have been successful recently saving a large percentage of our income, it hasn’t always been this way. Through our experiences (Bert has had a lot more of these than Lanny by the way) or by watching others, we have witnessed many financial missteps of people in your twenties. One of the best thing about the community we are in is that we share knowledge, and we have learned a ton about life, finances, and dividend paying stocks since we started this blog a year ago. So we wanted to share with you the top 5 lessons we have learned over the years in hopes that you can get your dividend snowball rolling as soon as possible.
There is one thing worth mentioning first, lessons can be learned in all shapes or sizes; the lessons can be positive or negative experiences or the lessons could result in saving $10, $100, or $1,000. The most important thing…you are take positive steps in the right direction! And please, after you finish this article, if you think we left an important lesson off the list that has helped you, a friend, or a family member, please share!
Lesson #1: Set Savings Goals. This is probably the most crucial aspect and our first of five money lessons, as without a goal your are just a ship floating directionless in the ocean. It is imperative that you have a plan to tackle any savings goal so you can measure your progress, evaluate the results along the way, and begin changing your habits to help you achieve and surpass the end game. The fun part about the goal setting process is that you can create any financial goal you want that best fits your current financial situation. For us, we set our savings goal at 60% of our monthly income, and this is what works for us in our current situation. For others, a goal could be to save enough to pay down outstanding student loans by an extra $100 per month, to save X number of dollars so you can save for a down payment on your house, or to even save $50 extra dollars each month. That’s the beauty of it, each person can create a savings goal that is tailored to their needs. The most important thing…you must create a goal! Also, you can see here, as Bert mentioned, you have “something” you are saving for – whether that is financial independence, student loans to $0, no more mortgage or enough for a vacation. The key thing is knowing “why” you are saving. I [Lanny] would come to close to saying that saving for no apparent reason is just money that is “lost” or without a cause. Find out why you are saving and make the goal that much sweeter.
Lesson #2: Minimize Your Monthly Rent/Housing Expense. While lesson one was theoretical, lesson two was a lesson that I [Bert] learned the hard way after college. Before proceeding further, this is for individuals that have chosen to rent instead of purchasing a house. I was so eager to move out and be on my own when I returned to Cleveland, that I settled into renting a place that was way larger that what I needed and you guessed it, much more expensive than it needed to be. I could afford it, luckily, but I was on the hook for $600/month for an extended period of time. This mistake cost me $7,200 per year and man, would those two years of rent payments look nice in my portfolio right now. At my current yield of ~3.8%, that money could be producing nearly $550 in annual dividend income. I am not saying that everyone needs to move back home, because that isn’t always feasible and let’s be honest, that isn’t an ideal situation for any of us adults. However, if I could pass one piece of advice on from this experience, if you have to rent, is to take your time, be patient, and make sure you exhaust all options to minimize your monthly rent expense. For most of us, this will represent our largest monthly fixed cost and will be the fastest way to improve your savings rate. In my situation, if I would have waited about a year, I probably could have moved into my current living situation, which is just less than half the cost of my old living situation. However, because I rushed my decision and didn’t do my proper homework, I cost myself a lot of money. Similar to Bert, I [Lanny] would suggest to limit your housing expense as much as possible as well. I wound up buying a house, and though I am building this make belief number called “equity” it still costs me a sh*t ton. Therefore – if that means you pay rent to your parents at $200-$300 bucks a month versus paying Bert’s rent of $600 or my full Mortgage + P/I at $850 – then go for that.
Lesson #3: Purchase an Affordable Car. As mentioned above, rent is typically your number 1 fixed monthly expenses. Typically, your car payment is right behind it. We have complained over and over again on this site, whether it is Bert trying to reduce his monthly car payment or Lanny running into some terribly unlucky scenario that results in his car needing to be repaired. Sadly, in today’s world, unless you live in a major city with great public transportation, you will unfortunately incur a car expense. For me [Bert], if I had to make my last car purchasing decision all over again, I would change so much. The great thing is, I learned a lot for my next buying experience! When I purchased my car, it was the pre-frugal version of me that had the same mindset as mentioned above. IF I can afford it, who cares. Unfortunately, that mindset had me purchase a brand new Toyota Camry that was ~$21k. Of course I didn’t have the money, so here I am with a nice auto loan. In hindsight, I should have taken Lanny’s approach of buying a used, reliable car for a much lower cost. With that approach, I could have saved over $100/month in car payments, which could have added $1,200 to my portfolio annually. While it is nice to own a new car, I would make sure you log many hours looking for a great used car because of the benefits it will provide your monthly savings rate and it will help you blow your savings goal out of the water. On top of that I [Lanny] would agree with Bert. Even though I bought used, I still wanted all of the bells and whistles with my 2010 Accord EX-L and still paid approximately $16.5K pre-tax for it. My auto payment would be much smaller if I kept my older car for longer (though it was pushing 215K miles) or even just bought another car a discounted price – say a used Corolla, Civic or some Hyundai and paid between $8-$12K for it. And here I am, as I currently owe $11.9K on my car… dangit!
Lesson #4: Pay Off Your Credit Card Statement Monthly. We both have a personal philosophy of only incurring credit card expenses if we can pay off the balance monthly, which can be difficult in today’s world of crazy credit card rewards programs that seem so beneficial at the time. But man, nothing can derail your savings rate than having to use your hard earned capital to cover the high interest rates credit card companies charge. While I know it is not possible in every person’s situation, so if you can, forcing yourself to only purchase on credit what you can pay off will help avoid unnecessary spending, create fiscal discipline due to the fact you are focusing that much more on your finances, and will allow you to use the extra capital towards achieving those savings goals from Lesson 1. Bert – did you really rack up interest expense on this before? Great lesson though, but hopefully you’re paying these off! Which… I think you are, right?
Lesson #5: Not Investing during my Teenage Years. Though I [Lanny] am happy where I am now in regards to the financials, we all know what time means to our portfolios and dividend income. I mean heck, what about max it for 10 years and forget it for the Roth? I could have been done investing easily by now into that thing! Regardless – when I worked as a kid, I worked to go to movies, buy clothes, eat subway and then repeat. I made thousands of dollars between the age of 12 and 19, but never invested into something that lasted more than that moment (okay… dates were longer memories). I wouldn’t trade any of those single moments for anything, because heck – that’s what life is about, but I wish someone threw a brick at my head and said = buy some stock with some of that! Though this isn’t a mistake with money, I would still say it was something that could have been used or done back when we were younger. Gosh… These last 6 years of investing have been insanely amazing, my portfolio is over $150,000 and it pumps almost $6K of dividend income. If I added 5 or even 10 years to that… we all know what it could have amounted to, as the power of dividend reinvestment, goal setting (#1), dividend growth rates would all mean in today’s world. Invest now and invest often.
Obviously, there are many mistakes we all make throughout our lifetime. These are 5 very heart felt mistakes and life lessons that, for the most part, we can all almost agree upon. We have to watch our debt levels, make sure we are saving more than we make and investing consistently. We need to hold ourselves accountable for our goals and create a gameplan to get there. Life is too short to not be passionate about reaching for “something”. What’s interesting is that cars, homes and everything comes and goes, but it’s the memories and lifetime events that stick with us beyond our years of being here. What are your thoughts with these 5 lessons? Have you had other life lessons or mistakes that you learned heavily from? Please let us know and comment below!