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Purchase Your Retirement One Item At A Time

|Includes: BP, JNJ, KO, PG, Exxon Mobil Corporation (XOM)

When I purchase stocks, I tend to try to mentally minimize the idea that I'm buying a "block" of shares of a company at a specific purchase price. Once I've spent that "block" of money, I try to immediately write it off in my head as if I never had it to begin with. Of course, in performing your due diligence BEFORE you make a purchase, you must take price into account along with company fundamentals and lots of other criteria that I'm not going to go into since they are not the point of this article.

Instead, when I purchase a stock, assuming the fundamentals check out, I try to think directly in terms of the actual income I am buying. If I buy $1000 of a stock which yields 5%, I have just bought $50 in income for the rest of my life. Or $10,000 for $500 in income. The amount of zeros is irrelevant. As a side note, you should be buying companies which can be expected to raise their dividend every year, so that $50 should be expected to grow at a rate faster than inflation, or at the very least, matching inflation. So at a minimum, you can think of that income as "equivalent to what $50 a year will buy me today," even though in future years the actual dollar amount of that $50 will increase.

Since most of us (myself included) are using Dividend Growth Investing as a method of achieving early retirement and/or financial independence, this method of thinking can therefore be used to "purchase" your early retirement on an item by item (or "expense by expense") basis. The first and most obvious recurring expenses (which generally are not going away) are things such as utilities. Lets say your natural gas bills average $100/month, or $1200/year. Assuming you buy an "average" dividend paying stock which pays 4% a year, you would need to save up $30,000 to "purchase" your gas bills for life.

I like to use 4% as an average sustainable yearly payout. If you are dividend growth investing, it is easy to put together a great portfolio of blue chip stocks that will generally come in with an average dividend yield of around exactly 4%. Usually you have your extremely safe, huge companies that tend to pay in the 3% range, think Exxon-Mobil, Coca Cola, Proctor and Gamble, Johnson and Johnson, etc. And you have your slightly smaller, somewhat more speculative and/or slower growth industry companies that tend to pay higher (5%+, such as BP Oil, Tobacco Companies, REITs, Utilities, etc.) So a generally safe and diversified portfolio tends to average out to around 4%. Even if you are using an alternative investment method such as index fund investing, the generally accepted safe withdrawal rate is also considered 4%, so this figure works equally well for both methods.

So by going through your budget and figuring out what each category will cost, you can then start purchasing your retirement, item by item or category by category. If you don't actively keep a budget, you can go back and categorize your spending after the fact. I use the free service "Mint.com" for this. Mint automatically links up to your bank account, and it will pre-designate most of your transactions into preset categories or "budgets" which you can change and/or customize if desired. For example, a transaction from a market will automatically be put into your "food" budget. There is also a setting to "always put this merchant in this budget," so for example if you bought something from "Steves Bakery" and Mint didn't realize it was a food purchase, you could check that setting, and any future purchases from Steves Bakery will automatically go into your food category.

I realize some people have reservations about giving their bank logon info to Mint, but I've never had a problem with it, and I believe millions (or at least hundreds of thousands) of people use it, and I've never heard of any problems. Alternatively, you can always download your transaction history directly from your bank into an excel spread sheet (most online banking websites have this capability) and just spend a few hours categorizing all the transactions yourself, and then add up the totals on a monthly or yearly basis. One downside to this method is that if you are going too far back in time, you might forget what certain transactions are and not know how to categorize them, especially if you buy a lot of small inconsequential nickel and dime type of things. I try to minimize my purchases (after all, any money spent on "stuff" is not going towards your investments) and the purchases I do make tend to be deliberate, so when I've used this method in the past, this hasn't been an issue. Of course, for this method to work you must also have to live off your debit card, if you use cash, etc you won't have a real record of your spending, so you'll just have to start collecting data from this point forward.

So, by going through this process, you can then figure all your different categories. In the tradition of "every long journey starts with the first step," you don't have to think of your retirement as some astronomically huge number that seems unreachable. Just start tacking it piece by piece. Obviously I'm simplifying all these numbers for clarity here, but let's say you find you have 20 different budgets which cost you $100/month or $1200/year each, so you need a total of $24,000/year to live off of (20 times $1200). For each $1200/year budget you will need to purchase $30,000 in stocks which pay 4% a year. Multiply that by 20 different budgets, and you're talking about a total required portfolio value of $600,000. Rather than thinking of it as "Oh my gosh I will never be able to save up $600,000 dollars!" Just tackle those things one by one and you'll make progress. Everyone's situation is different, but maybe you can save $30,000 per year, and your goal could be to buy one of your budgets every year. Maybe you can save $60,000 per year. Maybe you do a real estate flip or some kind of business deal and make $90,000. There goes three of your budgets. Again, obviously I'm simplifying the numbers, buy you get the basic idea. A large meal is eaten bite by bite. Just save up for one specific budget at a time. Tackle the high speed internet at @$30/month. That's $360/year @ 4%, you need $9000, then you're done paying for high speed internet for life. Then do the water bill. Then the gas bill, then whatever. To make better progress, start with your smaller budgets first. Eventually you will enjoy complete and total freedom. Happy eating, saving and investing!