Dear DTA,
Thank you for this newsletter. I can’t wait to see how it helps me. I need to generate the income to pay the out of pocket freshman college tuition for my daughter ($21,000). The need is great and I am motivated.
-Wilma
Thanks so much for writing, Wilma. Your goal of paying the college tuition for your daughter is extremely admirable, as student loan debt can be crippling for new graduates. Let’s see how we can help.
I’m not sure what kind of time frame you have in mind for this goal. The amount of time you have before you need to help your daughter will greatly affect the overall outcome of your plan; the more time you have, the more possible wealth and income you can build between now and then.
[ad#Google Adsense 336×280-IA]First, I do want to note that scholarships should be strongly investigated and considered, if they haven’t already been.
There are a number of resources available that are designed to bring potential students and scholarships together, such as a free scholarship search tool sponsored by the US Department of Labor.
Libraries and the school’s financial aid center can also help. Many state and federal agencies are also available.
Make sure not to pass up any opportunities here.
Billions of dollars in scholarship money go unclaimed every year!
As for generating extra/passive income, that’s something I’m very excited to talk about today.
I can tell you that I was personally worth a negative amount of money in my late 20s. That’s right, I was below broke. Didn’t know you could be worth less than zero? Well, that was me.
But I turned it around by aggressively saving and investing my money, which allowed me to build the six-figure portfolio I now control today – a portfolio that generates five-figure passive dividend income on my behalf.
I’m now in my mid-30s.
It took me less than seven years to go from very broke to essentially financially independent, so amazing things can happen in a pretty short period of time.
But building serious wealth and income requires serious commitment, hard work, and dedication.
I moved to a cheap apartment. I sold my car, using the bus (and my own two feet) to get around. I ate ramen noodles. I cut cable TV. I downgraded my cell phone plan.
And I used all the excess money I started to save through positive lifestyle changes to invest in high-quality dividend growth stocks.
I worked hard. Got a second job. Lived cheaply. Invested intelligently but aggressively.
If you haven’t seen it already, I recommend checking out my “blueprint” for early retirement. That’s essentially the blueprint I built and followed in order to reach financial independence in my early 30s.
Extreme output requires extreme input.
And being able to pay $21,000 without otherwise negatively affecting one’s lifestyle is a situation that many people don’t find themselves in.
But we’ll see what we can do to get you there.
Now, I’m unsure as to whether you’re really aiming to build wealth or income.
While the two generally go hand in hand, stroking a $20,000 check all in one shot is much different than being able to afford an ongoing extra liability of $1,000 per month for a long period of time.
So if you’re really trying to save up $20,000 – and that’s it – you’ll want to be very conservative in terms of how you invest your money. Think Treasury notes or a savings account. This is especially true if you’re going to need to pay your daughter’s tuition within the next 3-5 years.
That’s because if you’re investing your money in the stock market, it can and will fluctuate – sometimes wildly. I recommend people avoid the stock market if they need the money within the next 3-5 years.
Any money you invest in the stock market should be for the long term. It should be money you don’t need for many years.
But if you’re looking to build sizable wealth and income over the long haul, the US stock market is one of the best possible platforms for that.
In fact, I wouldn’t have been able to quit my day job in my early 30s if it weren’t for the stock market.
While the term “stock market” seems scary to some people, the stock market is nothing more than a market of stocks.
It’s simply a platform where you have the opportunity to invest in businesses.
Some of these businesses are lousy.
But some are truly wonderful.
I try to stick with the latter, which is why I invest in high-quality dividend growth stocks.
See, any good business should be able to routinely register higher profit. A great business should make more money in five years than it does now. It should sell more products and/or services. Otherwise, it’s probably not a very good business.
Well, when you invest in a company, you become a partial owner. You own a slice of a real business that’s selling real products and/or real services to real people. The profit is also real.
As an owner of a business, should you not expect to receive a portion of the profit it generates? And as the profit grows, shouldn’t your portion of that profit also grow?
I believe the answer to both of those questions is “yes”.
As such, I like to invest in companies that share their growing profit with shareholders in the form of a growing dividend.
The great thing about this relationship – which is actually quite intuitive – is that the growing dividends are a great source of growing passive income.
This growing passive income could be used to do many things, including paying for college tuition.
I’m not sure how much you already have saved up. And I’m not sure how long you have until you need to start paying tuition. But I’ll show you how compounding can really add up, even over a shorter period of time.
Let’s say you have $0 now. And let’s assume you have just five years to make this happen.
I’ll give you a couple different scenarios to consider.
First, let’s take a look at the power of high-quality dividend growth stocks.
If you’re able to put away just $500 per month over the next five years, assuming a 10% compound annual rate of return, you could end up with just over $39,000 (ignoring taxes and inflation for the sake of brevity).
That kind of portfolio could generate $1,560 per year in totally passive income, assuming a 4% average yield on the portfolio.
The other scenario would involve being extremely conservative with the money, assuming you’re just saving over the next five years only to cash out and write that $21,000 check.
If you can earn a 1% yield on your money (what many high-yield savings accounts are currently offering), while taking on no risk at all (outside of short-term inflation risk), that same $500 per month would compound into approximately $30,800.
If it’s still earning that ~1% in five years’ time, it would generate just over $300 per year in totally passive income.
So you can see a major difference here. We’re talking about $10,000 in wealth. And about $1,200 per year in passive income.
The difference becomes more stark over the long term: the former example would turn into over $103,000 over 10 years that generates over $4,100 per year in passive income, while the latter example would turn into just over $63,000 that generates $630 per year in passive income.
The time frame matters quite a bit. As does the way in which you go about putting your savings to work.
But given the limited information I have, being aggressive with savings and conservative with investing probably makes the most sense for your situation.
That would involve making some changes to your lifestyle in order to put away as much money as possible every single month. You should become a world-class saver.
The first thing you’ll want to do is track every penny in and out. That means setting up a budget. Every penny you earn and spend should be religiously tracked.
After all, you can’t determine where you’re at or where you want to go without knowing where you’re starting and where you want to go. Knowing the speed of travel is also important, as that’ll tell you when you’ll get there.
[ad#Google Adsense 336×280-IA]Where you’re starting is the amount of money you already have saved toward your goal.
Where you want to go is your destination.
In your case, it’s being able to cover your daughter’s freshman tuition.
The speed of travel is your savings rate.
You simply need to know the difference between your income and spending – and then divide that number by your income.
So if you earn $5,000 per month but spend $4,500, your savings rate would be 10% (500/5,000).
For perspective, I’ve had to average a net savings rate of over 50% since I started in order to get to where I now am.
Determining the first two should be pretty easy for you. The third aspect – your savings rate – will take a few months’ worth of detailed financial statements in order to grasp. The higher the savings rate, the better.
Once you’re saving your money, it’s time to invest it.
Whether or not you follow my method – dividend growth investing – will depend on your time frame. If your daughter is only 12 years old, investing your money in high-quality dividend growth stocks might make sense. And I do my best to give you readers plenty of great ideas via my weekly series of undervalued dividend growth stocks.
But if she’s 15 or 16 (or older), you’ll have to be very aggressive with the saving and probably fairly conservative with the investing.
That’s not to say that you can’t concurrently save for her tuition and invest for your own personal financial goals (like retirement). But the more goals you have, the more money you’ll need to save.
So research those scholarships.
See what kind of opportunities are out there. If you can get some help, that will lower the amount of money you need to save and invest in order to cover that expense, making your destination closer. That will reduce the speed at which you need to travel.
Then get to the budgeting and saving.
Track everything. Every penny. See if you can get the income higher and the expenses lower. That may involve making some sacrifices. As I shared, I didn’t get here by accident. I’ve had to make some major lifestyle adjustments. But the end result is most certainly worth it. Just imagine seeing your daughter graduate college. That could make getting a second part-time job for a year or two an easier pill to swallow.
Lastly, put your money to work.
If you need the money within the next few years, be very conservative. Think a savings account or Treasury notes. But if you have more time, high-quality dividend growth stocks, in my experience, can generate outstanding long-term wealth and passive income at the expense of greater short-term volatility. If you can invest for both your daughter and your own goals simultaneously, two investing strategies may be necessary (depending on your age, personal goals, and appetite for risk).
Start now, Wilma, for compounding is more effective when it has more time to work for you.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.