Dear DTA,
I would like to purchase a home next summer and pay cash for it. I’m looking at houses priced in the $550,000 range. I have never invested at all before. And I have very little money to start with.
-Martin B.
Hi, Martin. Thanks so much for writing in to us.
That’s an incredibly lofty goal you have there. To start with very little and end up being able to pay ~$550,000 cash for a house in less than a year sounds, well, impossible.
That’s just not how investing works.
And so what I’m going to do for you is provide some food for thought. I’m going to give you a framework to work within. Lastly, I want to make sure you have reasonable expectations.
Now, I know very little about your overall financial situation.
For instance, maybe you have a very high income. If you do, that’s going to help. But outside of making a seven-figure annual income, I think you’ll want to really think about scaling things back quite a bit.
The thing is, if you want access to cash money in less than a year, investing in the stock market at all probably isn’t a terribly good idea. That is, whatever liquidity you’re aiming for in a very short period of time, that money should be invested very conservatively (money market, Treasuries, etc.).
That’s because the stock market is historically very volatile, especially over shorter periods of time.
Your time frame is incredibly short, which heavily exposes you to that volatility while simultaneously minimizing your exposure to the wonderful effects of compounding.
Compounding is incredible. It literally creates money out of nowhere.
But compounding needs time.
And even the best stocks in the world can cause short-term unrealized losses before those big long-term gains set in.
Moreover, even wonderful businesses need time to increase profit, move the dial on the value of the business, and create more wealth/income for you.
This process, while fantastic, does not happen overnight.
As such, something in your plan probably has to give.
That said, you have a number of levers that you can pull to maximize your chances of success.
Making more money is one lever. Spending less money is another. Increasing your time frame is yet one more. Reducing your expectations is another potential lever.
Making more might involve you working more hours at work. Or perhaps adding another (part-time) job to your schedule. Anything to improve your incoming cash flow.
Spending less would involve adopting some heady frugality. I don’t know where/how you’re living now, but significantly downsizing until you’re ready to buy that house could help immensely.
I’m a great example of using frugality to help me achieve some long-term financial goals.
By moving to a cheaper state, then moving to a cheaper place, selling my car and riding the bus, and eating my fair share of PB&J, I significantly increased the amount of excess capital I could invest.
And that excess capital was used to build the real-money six-figure portfolio I now control, which generates five-figure growing passive dividend income on my behalf.
Perhaps surprisingly, I did that in just a few years. And it was all on a middle-class salary (I averaged somewhere around $50,000/year from my day job while I built that portfolio).
But while it was just a few years, it wasn’t overnight. It wasn’t less than a year.
I started in 2010. And most of that portfolio was built by the summer of 2016. So we’re talking six years for most of what you see now.
Six years isn’t a long time, but it’s certainly a lot longer than the time frame you’re talking about.
That’s why increasing your time frame could be a very powerful lever for you.
More time also means you don’t have to be so conservative with the investing.
If you have at least a few years to work with, that means you should feel a lot less uncomfortable with the idea of investing in stocks.
That’s because you’ll have a lot more aggregate capital to work with. And you’ll also have more time to overcome short-term volatility.
Giving yourself a few years or so means you could invest in world-class businesses that can grow your wealth and income.
I’ve personally used the investment strategy of dividend growth investing to propel myself to financial independence in my early 30s, and it’s an investment strategy I recommend to pretty much everyone.
This strategy involves buying high-quality businesses that reward their shareholders with growing dividends.
These growing dividends are funded from the growing profit these businesses generate, which is manifested when they sell products and/or services that people all over the world desire.
Think iPhones from Apple Inc. (AAPL). Chips and beverages from PepsiCo, Inc. (PEP). Medicine from Johnson & Johnson (JNJ).
These products (and many others) literally make the world go ’round.
You can collect a chunk of the profit that these fantastic businesses earn. And as their profit grows, so can your wealth and income.
Checking out David Fish’s Dividend Champions, Contenders, and Challengers list will show you what I mean – you’ll find more than 800 US-listed stocks that have paid increasing dividends for at least the last five consecutive years.
While the growing dividend income might not be your focus right now – you’re looking to build up a sum of cash to pay for a house – this will help you snowball your wealth, because you’ll be able to reinvest a totally separate (from your active income) and passive source of cash flow back into your growing wealth.
It’s like having an invisible worker, working alongside you and giving you their entire paycheck… without you lifting a finger.
That’s more passive income buying more shares which will pay more dividends that are also organically increasing.
That process can’t help but get you to where you want to be faster.
Furthermore, research has shown that dividend payers and growers (i.e., high-quality dividend growth stocks) outperform the broader market in terms of total return, which shouldn’t be a big surprise given the process I just laid out.
Fellow contributor Dave Van Knapp put together a great series of “lessons” on dividend growth investing that act to provide knowledge to newer investors like yourself. This series is very much worth a read.
And then if/when you’re ready to put capital to work, I personally highlight an undervalued high-quality dividend growth stock idea every Sunday.
These are compelling long-term investment ideas for readers just like yourself, totally free of charge.
Finally, you may want to think about reducing your expectations.
To just save up $550,000 in a very short period of time is very difficult.
But perhaps the benefits you’ll see when you start living below your means (increasing wealth and passive income due to the additional newfound capital you’ll be able to invest) will show you that, just maybe, a $550,000 house isn’t totally necessary.
However, could you not be in a position to buy a very nice (and relatively large/expensive) house in cash within a few years, starting from where you’re currently at (effectively $0)? That’s certainly plausible, if you really give it your all.
Either way, though, the key will be starting as soon as possible.
As mentioned earlier, Martin, compounding needs time, and you have less of it every second you wait.
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.