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.

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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.

How to Live with Annoying People

You must always have a way of getting out when things go wrong.

When most people try to save money, they look at small expenses such as coffee. According to David Bach’s “latte factor” concept, by skipping your daily coffee, you save about $4 per day, and this adds up to about $1000 per year.

While I do not disagree that skipping your daily coffee can help you save, I’d rather put my effort into actions that have a bigger impact. The biggest expense that most people face is accommodation, i.e. putting a roof over your head.

My recommendation for those who want to save money on accommodation is to live with other people. Either buy a house and rent out spare bedrooms to others (e.g. via Airbnb) or rent with others. Another simple way to live with others is to live with your parents. By living with others, costs are spread out.

However, living with others is not easy. That being said, if someone wants to pay more money to live by himself, I have nothing against this because I know how bad it can be to live with other people. For example, today is a Sunday, and I live with my parents. Today I was at home in my bedroom on my computer. My mother was in the living room. She is screaming something to my grandmother, arguing about food. I could not concentrate at all.

My recommendation to those who live with others to save money is not necessarily to move out. Rather, the answer can be as simple as getting out of the house.

Annoyed that my family were making too much noise, I had a shower, got dressed, grabbed my laptop, hopped into the car, and drove to the local library. I am typing this blog post right now in the local library.

Like I said, living by yourself is fine. It makes sense to have your independence and privacy. However, living with others can save you a considerable amount of money. It can be annoying, but the annoyance can be mitigated to some extent simply by removing yourself from the house most of the time.

Driving out of the home when the family goes crazy, in my opinion, highlights a fundamental law that all freedom extremists must be aware of: always have an exit plan. No matter where you are, no matter what relationship you have with anyone, be it a professional relationship or an intimate relationship, you must always have a way of getting out when things go wrong.

Be free.

 

Don’t Bite the Hand That Feeds You

Don’t bite the hand that feeds you. Instead, lick it, and suck on it lovingly, even if it’s stained with shit. If you don’t suck it, you won’t be fed.

This expression really illustrates how soul crushing the 9-to-5 is. You can’t object to whatever is paying your bills or your mortgage. You got to kiss ass. You got to kneel down and submit just like the slave you are.

But what if, instead, the hands that feed you are rivers of cash from passive income? What if you lived off dividends from shares, rent from real estate, interest from bonds, revenue from ebooks?

If hands offer you food, then eat, and if those hands abuse you, you are free to refuse their feed.

You can also bite back.

Don’t Aspire to Buy and Live in Your Own Home

There is much talk of a housing affordability crisis in Australia. Average house prices in Melbourne and Sydney are reaching $600,000 or even more.

However, for young people looking to buy a house, my recommendation is that you do not buy.

Instead, go to your parents and negotiate with them an arrangement whereby you pay, say, $300 per month to live with them. Depending on how nice your parents are, they may even allow you to live with them for free.

If this is not an option, try to arrange to share a house with other people.

If you do buy a house, consider ways you can offset the burden of a big mortgage, such as renting out spare rooms.

I know a friend who, after purchasing a house, decided to renovate the garage so it was liveable. He lived in his garage and rented out the rest of the house. The rent was pretty much able to cover the mortgage repayments, which meant he was able to pay off the mortgage in about six years.

I have lived with my parents for the past five years and have been able to save up about $60k per year. After five years that adds up to about $300k, but rather than invest in property, I prefer to invest in shares, index funds, and managed funds. Nevertheless, shares have gone up in value in the last five or six years, and my net worth has increased at a rate of about $100k per year, which gives a net worth of about $500k now.

It doesn’t matter whether you invest in shares or property. Both are good investments. However, I believe shares are better because they usually make more money and because you generally pay less tax (although this depends on which country you live in).

To sum up, try to live with your parents. If you rent, try to rent with others. If you buy, rent out the rooms. Any of these three strategies frees up money to allow you to invest. You’re not really investing much if so much of what you earn goes towards paying interest, which is the situation most people have when they take out a massive mortgage to buy their dream home. It is true that rent money is dead money, but interest is also dead money.

The main benefit of real estate as an investment is the ability to borrow money to invest. If you are able to borrow more money, you have more assets exposed to the market, which means returns are higher. However, this can be achieved via index funds or shares simply by getting a margin loan (i.e. borrowing to invest) and/or investing in internally leveraged ETFs (i.e. investing in a fund that borrows to invest).

Note that just because you can use debt to make more money, it doesn’t mean you should. Borrowing to invest can be profitable, but there are many assumptions you are making about interest rates and returns. With leveraged ETFs, fund managers usually use dividends to pay off their own debt, which means the investment produces very little income. Furthermore, when you borrow to invest, you usually need to make regular monthly repayments. These regular monthly repayments diminish the value you get from any passive income you may receive from dividends or rent. Debt is anti-passive income and therefore anti-freedom. Borrowing money from the bank makes you are slave to the bank.

There is a myth pervasive in Australia and many other countries that renters are second class citizens who must aspire to own a home because owning a home makes money. This is a lie. What matters is how fast your net worth increases. Most people who buy a home have such massive mortgages with huge interest repayments that their net worth increases very slowly because any progress made when the price of the house goes up is quickly lost when they have to pay interest. Their net worth would have grown faster if they had rented a cheap place and socked the saved money into index funds.

It is not just interest. Buying a house is also associated with massive fees to accountants, real estate agents, and lawyers, as well as huge taxes (such as stamp duty in Australia). All these bring down the growth of your net worth, often by more than people expect.

When most people at my work “invest” in property, I never hear them talk about the rate of growth of net worth, rental yields, or variability of prices. They seem more keen to talk about how nice the patio is, whether the kitchen has a granite bench, and whether it has period styling. All this is bling that distracts them from the massive expenses associated with property.

Don’t bother buying a house. They are clunky massive assets that are taxed heavily and usually produce little returns. They tie you to one place and stifle your movements.

Passive Income vs Laptop Income vs 9 to 5 Income

You do what you want, when you want, with whom you want, wherever you want, how you want.

I am a strong believer in passive income, which is defined as income you earn from doing nothing. Passive income includes dividends from shares, interest from savings accounts, or even revenue from Amazon eBook sales or Adsense revenue from YouTube videos.

However, passive income tends to be low. Interest from a bank account will give you about 3 per cent. Depending on which shares you buy, dividend yield tends to be around 6 percent or so, although it varies across companies and across countries. An investment that I invest in that currently pays a yield of about 12 per cent is the Betashares Australian Dividend Harvester Fund.

While passive income is excellent because you don’t have to work for it, I do not hate working. I hate my nine-to-five job, but it’s not the actual work I hate. I just hate having a manager tell me what to do, and I am not the only one. Studies show that about 70 percent of Americans hate their job and their bosses and are disengaged.

This is why it is important to earn money online. I call this “laptop income.” It is not as good as passive income but definitely better than the salary from a 9 to 5 job.

Earning money online is not necessarily passive. You may need to post videos on YouTube, run an eCommerce store, send emails, write blog posts, trade shares online, and so forth, but it is work that can be done on your laptop while you are in a cafe. It is work that you can do anywhere where there is internet connection, and you don’t have a boss watching over you.

You do what you want, when you want, with whom you want, wherever you want, how you want.

If you are new to working online, here are three ideas.

  1. Work online: This is not that great because freelance work is a lot like a 9 to 5 job in that you have a client you work for, a client you need to keep happy, but working online means you get to choose who your clients are. Filling in surveys (e.g. at Pureprofile) and completing projects at Upwork or Freelancer can earn you money, but the amounts are not huge. Freelance work can make you serious money if you are talented in a specific area.
  2. Create or build something: This includes blogs, ebooks, YouTube videos, websites, eCommerce stores, etc. This is the best way to make money. You must be a creator rather than a consumer. Rather than watch YouTube videos, make them instead. Rather than read articles, write them. This is where it is important to get rid of distractions because too often distractions from Facebook and other social media can make you too much of a consumer rather than a creator or a builder. I manage distractions by simply putting it off. For example, suppose I am browsing my email and I see a link to an article I need to read. I use the app Pocket to save it and read it later. This is a very useful app. If there is a YouTube video that I feel I need to watch right away, I save it to a playlist where I can watch it later. Put off distractions for later and focus on building and creating things of value.
  3. Monetize what you create or build: This can be achieved using advertisements with, say, Adsense (I prefer to use Anonymous Ads, which pays you in bitcoin and allows you to remain anonymous). That being said, advertising does not make much money. Other options include affiliate links (e.g. via iHerb and Amazon) or even creating your own product or eCommerce store and advertising your own products on your products. Creating and advertising your own products allows you to make the most.