When I solicited for questions right before Thanksgiving, the most common question that I received was something to the effect of: How do you get started investing if you have a low income and don’t have much by way of disposable income to get started?
Although it’s a topic that a lot of finance writers like to make needlessly emotional, for me, it’s nothing but a function of math. When we talk about turning money today into something impressive at some future point in time, there are three variables that control everthing:
The amount of money we have to invest.
The growth rate of that money.
The amount of time that we can set that money aside.
For the most part, we’re going to be looking at growth rates between 8-12%, with full dividends reinvested. I can tell you that there are 75% or so odds that Coca-Cola will compound between 8-12% over the next ten years. And if we assume that 2023 won’t be a 2008-2009 type of year for investors, then we can probably boost that probability up to the 90% or so mark. But I can’t really predict companies with any accuracy that will compound at rates greater than the 8-12% range, so that part is “locked in” somewhat.
Likewise, the amount of money is already baked into our assumptions because the question calls for advice with low starting dollar amounts.
The only variable left is time. That is the tradeoff you have to make. If you don’t have a lot of money to begin with, and you don’t have the talent to grow like Apple in the 2000s, then you are going to have to set aside your money for decades to give it the time to turn into something meaningful. You have to let the “Holy Trinity of Wealth Creation” (fresh cash deposits, dividend growth, and reinvested dividends) build on itself relentlessly, over and over.
You know that melancholic ending to The Great Gatsby when F. Scott Fitzgerald wrote: “So we beat on, boats against the current, borne back ceaselessly into the past”? Dividend investing with blue-chip stocks is like an optimistic, forward-looking version of that. You identify the excellent companies that are profit-churning beasts, and you relentlessly add to them, month by month. You then relentlessly reinvest the dividends, quarter by quarter. Then the company relentless raises the dividend, year by year. You need to tap into the energy of that cycle. You need to tie your future welfare to something great, and constantly add to it.
By the way, there is a difference between “not having any money to invest” and “choosing to buy things rather than use your money to invest.” One of my best friends in law school picks up a $20 Bud Light Platinum after class every Friday. I know the class he has on Fridays, so I do not blame him.
But still, that money represents $80 that could have gotten invested into shares of Anheuser-Busch stock. Every five weeks, he could be picking up a share of Anheuser Busch stock instead of drinking. Instead of being the consumer, you can be the owner and establish the rights to $2.22 in annual income that has a very good chance of increasing substantially over every five-year rolling period.
This is no way a criticism of his decision, but rather, a reminder that every purchase decision we make effectively says, “I’d rather have this item” than a proportional amount of Exxon, Colgate-Palmolive, General Mills, or whatever stock. A lot of times, it makes sense to buy things—you need to make life worth living. But life is more fun when you live it deliberately and consciously think about the path that each decision takes you down.
Just by going through my pockets in the last week, I was able to find $8.
Most people would look at that trifling amount of money, shrug, and not give it a second thought. But what if I took that money and bought $32 worth of Johnson & Johnson stock each month, and repeated the process for 30 years? And by the way, this is something you can actually do, since Computershare (Johnson & Johnson’s transfer agent) only requires $25 per month per month to initiate a purchase through their direct stock purchase program. If Johnson & Johnson performs exactly the same from 2013 through 2043 as it did from 1983 through 2013, then that $8 per week savings habit will grow into $242,000. You just bought yourself a nice house in cold hard cash.
Of course, Johnson & Johnson may perform better or worse over the next thirty years—I don’t know. But hopefully, as you start to see those quarterly dividend checks accumulate and grow on their own every year, you’ll get the savings bug and increase the amount you set aside. Hopefully, you’ll acquire more skills and experience and increase your income at some point, which could also grow your savings rate.
Our financial destination is determined by three things: the amount we set aside to invest, our growth rate, and the time we let compounding do its thing and provide you tangible proof that Einstein knew what he was talking about when he called it the 8th wonder of the world. The growth rates are locked in unless you have exceptional skill, and when you are grinding it out, the variable that you have to lean on is time. My guess is that once you see investing work and become emotionally invested in it, you’ll starting finding a few hundred dollars here and a few hundred dollars there to increase Element #1 to improve your end result. Focus on what you can control. If you don’t have much, then lean on time. And if you can adjust your life to save more, you can lean on money set aside and time. Increasing any of the three elements just increases the size of the snowball as it rolls down the hill.