How to Live Off Dividends

It’s the Christmas season now. My family does not really celebrate Christmas. I remember being really disappointed not receiving any presents when I was a child because my parents were always busy and didn’t really think about Christmas. Over time, I began to accept this as normal, and now that I am an adult, it doesn’t bother me at all. There is definitely something wasteful about Christmas. People suddenly splurge on toys, clothes, and gadgets. They eat large amounts of food. Then when January comes around, they are back at work slaving away. Chances are their bellies are bigger, and when they get their credit card bill, they realize their debt is bigger as well.

For me, Christmas in 2015 has been a spartan and minimalist Christmas. I remember my previous Christmases. I would buy all sorts of presents for family and friends, and I’d usually have a credit card debt in the thousands, but nowadays I usually use a debit card to make purchases. I do have credit cards, but I pretty much only use them for emergencies or online or foreign purchases. Even when I use my credit card, I pay it off maybe within a few days.

During past Christmases, I would always dread going back to work the next year. When everyone winds down at work, it’s a nice feeling. Office Christmas parties, Christmas decorations, and so forth set a nice and relaxed atmosphere, and I look forward to having time off to relax.

However, during the holiday period, and especially during the new year, you think about the year that has ended and naturally you think about your life. You think about your career and whether you’ve done the best you can. It can be stressful.

This year is different for me mainly because my dividend investing has gotten to a point now where I can live off dividends. When I started working, I was saving about 85% of my take-home pay and living off just 15% of it. I invested in shares, managed funds, or ETFs that pay high income. As time goes by, the amount your investments pay you will rise, and when they reach a point where they are equal to your expenses, you are a free man because you are no longer dependent on your job. If you quit, you can live off your investments.

“Although freedom does not guarantee happiness, it is the best assurance we have for obtaining happiness.”

~ Andrew Perlot

Every man should strive for freedom, and the easiest and simplest way I know of obtaining freedom is to build passive income.

I am going to lay down below the steps I took to live off passive income. Most people should be able to do what I have done.

Save 85% and create two separate bank accounts

As I have said earlier, living off dividends starts with saving up about 85% of your income. I recommend setting up two bank accounts. Talk to HR and ask them to send 85% of your income to one bank account. The other 15% will go to a separate bank account.

Having two bank accounts is an excellent system to separate your “spending money” from your “investing money.” Spend only from your spending account. Use your investing account for investing.

Live with others to keep costs down

Living with others can be tough, but it is the easiest way to save significant amounts of money to allow you to hit your 85% savings rate. Accommodation is the biggest expense most people face, so it makes sense to hit it hard. Most people focus on trying to save money on small things like coffee (see David Bach’s latte factor) or discount vouchers for t-shirts!

In my opinion, don’t bother with the little things. If you want to have a soy latte, drink it! So long as you are spending 15% of your income, you’re fine.

Living with parents is the best policy, in my opinion, especially if you get along with them. If this is not possible, then renting with others is also another option. You can even buy a house and then rent out spare rooms to bring in rental income. All these three options should cost approximately the same (although living with parents could be free depending on how generous they are).

Related reading: How to Live with Annoying People

Save money via abstinence, not discounts

When trying to save money, most people make the mistake of trying to look for discounts. For example, when buying jeans, they look for jeans that have 50% off, or when they travel to Thailand they look for airfares that are 30% off.

An even better strategy is to just not buy the jeans in the first place and not travel. Discounts often lure people into spending more than they otherwise would. Often discounts are fake, that is, an apple may be $10 but be 50% off, and so the discounted price is $5, but in reality that apple only cost about $0.50 and the retailer made a $4.50 profit. In other words, forget about the percentage discount and think about the actual price.

Basically the only necessities in life are accommodation, clothes, transport, internet, and food.

Do not conform. Rebel against society

If you’re living with your parents, driving an old car (or taking public transport), watching YouTube rather than cable TV, then many people will think you’re weird. They will put you down and try to persuade you to conform. Try to resist. Don’t conform to society. Do what you want to do. Also remember that this is not permanent. As your savings go up, your dividends will go up, and your standard of living will go up, but this will take time.

If you must, borrow from yourself

Spending only 15% of your income might be difficult, and you may run out of money when you need to spend on something you need.

If this is the case, one option is to borrow from your own savings. This is where setting up two bank accounts is a great idea. You transfer money from your investment bank account into your spending bank account. You then keep track of how much money your spending account owes to your investment account. The aim is to pay yourself back as quickly as possible.

Invest for income

Invest in a variety of assets that pay high income, e.g. ETFs, shares, and managed funds. If you’re unsure where to go, sign up for an online broker and buy shares in banks. Banks typically pay high dividends. As of December 2015, shares in Australia’s ANZ bank provide a dividend yield of 9%. I recommend using Bloomberg to find the indicated dividend yield of an investment.

IMG_20151228_191209

Diversify your investments and always direct dividend payments to your “spending account.” This means that over time, the amount you have to spend increases, which should motivate you to keep saving up.

Invest 100% of your income

Once your passive income from dividends (or other sources) is high enough, talk to HR at work and direct 100% of your salary to your “investing account” so that you are living off passive income. This may be difficult to do, but just remember there is no rush. Once the 15% you get from your salary seems like a small amount compared to your passive income, this is a good time to cut it off completely so that you can actually live off dividends.

 

Cruelty is Natural

“Why should man expect his prayer for mercy to be heard by What is above him when he shows no mercy to what is under him?” ~Pierre Troubetzkoy

I remember having lunch with my dad a few days ago. I was talking to him about why I didn’t eat meat. As far as possible, I wanted to reduce the suffering I cause on other beings.

My dad, a meat eater, naturally defended himself by saying that animals eat each other in nature, and so it is natural for animals to kill and eat each other, and so we should kill and eat animals. But I reminded him that throughout history humans have fought against each other. We humans have tortured each other, and we have also raped, enslaved, and murdered each other. If nature is a guide for how a man is to live, why shouldn’t I murder another human and steal his belongings? Why shouldn’t I hold captive an attractive woman for my own pleasure?

I do believe that my dad is right though that cruelty is natural. We see it everywhere in different forms and different magnitudes.

Those who are strong take advantage of those who are weaker. This is a law of nature.

If you don’t like this law of nature, which I don’t, then there is a two-step solution:

1. Become strong.

2. Use your strength to protect the weak.

The first step is important. If you’re not strong enough to protect yourself, you will be exploited.

In today’s society, money is power, and debt is slavery, so try to focus on working hard, keeping expenses low, and keep savings high. Aim to produce passive income that sends cash into your bank account without you having to lift a finger. Try to minimize your debt as much as is reasonable.

Once your passive income exceeds your expenses, this means if you lose your job the next day, you can live off passive income. You are no longer dependent on your job. You can continue working, of course, but there is no stress. You don’t have to kiss the boss’s ass. You can take it easy at work. You have no credit card, car payments, or mortgage to pay. To minimize the risk that your investments fail, you have diversified your investments, making sure you have multiple streams of passive income. As they say, many streams form a river.

Once you are free, then life becomes serene and somewhat boring. You’ll probably feel the need to have more. You’ll want to work more, invest more, and produce more passive income to increase your satisfaction. Then you realize that you are similar to the average wage slave who borrows more and more just to buy more and more, thinking it will give happiness, but humans are strange in that they adjust to what they have and keep wanting more.

I suppose this is why it’s important to pursue some big goal, some unwinnable war that will give you meaning and purpose in life. For me, it’s reversing the natural law that the strong must be cruel to the weak. The strong can also protect the weak.

For others, it may be some other unwinnable goal.

For a long time I have been exploited by those above me. Many have cheated me, including trusted friends and even close family. I’ve been through a lot, but I try not to let these experiences bring me down. I understand that it is natural for others to cheat and lie. Even friends and family will do it. You need to accept it and expect it. You need to learn to live in the world, so you need to learn how to adapt to reality. This is essential if you want to build passive income and escape from wage slavery and become financially independent.

But once you are free, once you are lying on a deckchair by a pool in a beach resort thinking about your life, once you realize that your wealth and power enables you to exploit other beings for your own benefit, think about your own struggles. Think about what it took, the hard work, the difficulties, the loss of innocence upon realizing how cruel those above you can be, and then use your power to reverse this law of nature. 

Reach out to others out there to help them avoid exploitation. Encourage them to break free from their shackles.