Today’s post is a guest contribution from a fellow blogging friend of mine, Sean from The Money Wizard. When he approached me about sharing his journey to building an early retirement portfolio, I was intrigued because he comes from the financial world. It’s a world where people celebrate high salaries, high expenditures, and retiring early is hardly even a consideration.

He saved $100,000 by the time he was 25. Broke $150,000 a year later. And then $200,000 a year after that.

There were no windfalls or inheritances. He has a good salary but not an exceptional one ($50,000-$80,000).

He also has some good habits and ideas and I wanted him to talk about what he did to save $250,000 in his 20s.

If you’ve spent any length of time in the Personal Finance community, you’ve heard the standard advice a million times. Create a budget, spend less than you earn, make steady investments… yada, yada, yada.

While those fundamentals are certainly important, I’m not going to bore you with another round of those again.

Instead, as I sit here reflecting on the moves I made to save $100,000 by age 25, and then hit over $250,000 by age 28, I’m going to focus on all the things I did to make myself look like a total oddball.

Isn’t that more fun?

Because after all, to get unusual achievements, it takes unusual action.

Hopefully, by sharing these, we can blow past the regular money advice, step off the beaten path, and start focusing on the fringe-like money moves it takes to fast track your finances.

1) I started investing early. (I mean, really early…)

In the investing world, “young” is typically considered anytime before you’ve started panicking about your upcoming retirement. If you’ve only got a couple of gray hairs, even better.

So, I flipped that script.

Instead of beginning my investment career during a midlife crisis, I pushed it up a couple of decades.

… I made my first investment before I could drive.

Most teenagers save a little bit of cash so they can make it rain on their high school crush at the movie theater’s concession stand.

And while I was just as susceptible to that high school drama as the next dude, I saved a portion of my minimum-wage earnings for another purpose.

Inspired by a high school math teacher who explained how a few years of compound interest could make anyone a millionaire, I made my first investment when I was just 15. I took $500 from my leftover summer earnings, and I shuffled it from bank to bank, searching for the highest interest rates on Certificate of Deposits.

The feeling of my money earning its own money was intoxicating.

By the time I was 18, I’d worked up the courage to invest my first dollar in the stock market. At first, I tried to be the next Warren Buffett, pouring myself into financial statements and predictably, making some costly mistakes.

Eventually, I wised up to passive index investing ideas like the three-fund portfolio. Throughout college, I continued funneling any extra change I could find into these funds.

The result? By the time I was 25 and made my grand appearance to the world as “The Money Wizard” with $100,000 to my name, my money already had a decade of compound interest at its back.

2) I rented a mediocre at best apartment in the ‘burbs

After graduating college, I suddenly found myself adulting in a new city.

As a native Texan, I’d just accepted my first job in finance in Denver. I was excited to try my hand at a brand new city and state, but I had a big decision about the place I should get.

I’d read up on the average American budget, and I knew the typical American spent 37% of their money on housing. The way I saw it, saving a couple of hundred bucks a month on rent could be the easiest money I ever made.

So, I found myself a basic place in the suburbs. Sure, I didn’t get to brag about whatever downtown high rise I was renting (in the world of millennials, living in the burbs is about as cool as admitting you’re a Star Trek fan.)

But my choice to live a few minutes outside of the trendy downtown meant I was saving almost $500 a month. With that money, my savings continued to build each month, without even trying.

Plus, with the cash I was saving on rent, I could easily hire an uber driver to send me back into the action whenever I felt the urge.

3) I said no to materialism

Around the same time, I stumbled onto the idea of minimalism.

For whatever reason, the idea that less is more is completely foreign to our culture. We could blame the strategic deployment of billions of dollars from the most sophisticated marketing budgets in the world, or maybe it’s just an innate human desire to own stuff.

Whatever the case, I started questioning whether spending money on the latest gadget would make me happier, or whether using that same money to get myself closer and closer to financial freedom would be a better decision.

I began passing on expensive artwork, junky knick-knacks, and an overflowing wardrobe that I knew I’d never wear. I made a game for myself, to see how often I could walk through a shopping mall, art festival, or gift shop completely unphased. Could I appreciate something for what it was, without the succumbing to the immediate urge to own it?

To my surprise, this adjustment was way easier than I expected. Because when you know your money is going towards a higher purpose, buying a cheap piece of whatever feels like a total waste compared to building investments and buying your freedom.

4) I kept my beater as long as possible

After my epiphany about materialism, vehicles found themselves as one of the items most in my crosshairs of questioning.

My salary was pegged at $50,000, and I didn’t want to become yet another $50K Millionaire. You know the type… gets a job, becomes overly impressed they’re no longer making minimum wage, and… promptly gives away all that newfound earning power to a sneaky car salesman.

So instead, I drove my 13-year-old beater pickup truck for as long it could last, saving hundreds each month in a new car payment.

5) I killed all recurring bills.

Amazed by how much easier saving was thanks to my cheap rent and nonexistent car payment, I started wondering what other automatic savings I could build into my budget.

I soon placed any monthly payment right in the center of my budgetary ax. It didn’t matter how big or small the bill, if I was cutting a check for it every month, I seriously reconsidered whether I should keep paying for it.

I canceled my cable. I passed on the premium music app. I renegotiated down my gym membership, and I said no to the thousands of insurance offers I was being pitched.

Combined, these built another hundred dollars or so of savings into my budget every month. Savings which would repeat, every month, with zero effort on my end.

6) I replaced expensive hobbies with cheap ones

Soon thereafter, I came to an interesting realization about our free time. We choose our hobbies, and yet their prices range from incredibly-freakin-expensive to earning you money.

And yet, we seem to enjoy them no matter what, otherwise they wouldn’t be our hobbies.

So, when we’re not yet millionaires, why not choose the cheaper options?

I started questioning nightly bottle service at ‘da clubs, and instead built frugal hobbies into my lifestyle.

With my cable cord already cut, I diverted that couch time towards blogging, which to my surprise, can be a pretty profitable hobby. I started reading books about finance, learning how to cook, and enjoying the great outdoors with friends.

I focused more on going to the gym, which was a fixed cost whether I was lazy or used their services every day.

Might as well get my money’s worth!

That said, I did still keep snow skiing, which just might be the most expensive hobby in the world. You know, for balance’s sake.

7) When it came time to buy the home, I slashed the suggested home price in half.

When it finally came time to move on from renting, I wanted to keep the savings rolling.

So, despite the squeals from my realtor and lender, who both have an inherent interest in me spending as much money as possible, I pegged my budget at about half what my peers were purchasing. (On my now ~$80,000 a year salary, even Mint.com suggested I buy a $485,000 house!)

That decision worked out a-ok, since I was able to find the house of my dreams for just $180K, and continue saving huge chunks of my paycheck every month.

Want to improve your finances? Don’t be afraid to live differently

“Yeah, that’s all great Money Wizard, but enough about you. What about me?”

Here’s the thing about my story. While the steps I took might have been unusual, none of those steps were all that difficult.

Switching out a few hobbies? Saying no to mindless purchases? Tempering down the home budget? None of these choices significantly impacted my daily life.

What did impact my life? Freeing up thousands of dollars in the monthly budget.

For me, I’m using those savings to put myself on pace for something equally unusual – the ability to completely walk away from mandatory work when I’m still in my 30s.

Maybe you have a similar goal. Or maybe, you’re saving to invest in a side business, grow your discretionary income, or even just build up your first emergency fund.

In any case, the question remains. What strange steps could you take to improve your finances today?

“If you will live like no one else, later you can live like no one else.”

The Money Wizard is a 20-something financial analyst by day and money blogger by night. He’s on a mission to build a million-dollar portfolio and retire in his 30s. His friends call him Sean, and when he’s not busy working or writing about money, he can be found cycling, skiing, or visiting a few too many breweries. You can join thousands of others using his journey to learn about financial freedom at MyMoneyWizard.com.

The post 7 Unusual Steps I Took to Save $250,000 in My 20s appeared first on Best Wallet Hacks.

I’m a big fan of dividend investing. I took advantage of cheaper stock prices during the last economic recession and stumbled my way into a sizable dividend portfolio.

Now that we’re nearly a decade away from my initial acquisitions and the markets have surged back, I’m sitting on big gains and healthy cash flow.

Today, our annual dividends exceed the annual salary I was paid in my first “real” job. It’s a nice little monthly dividend paycheck.

I had a process of how I picked the companies but I was in a very favorable environment. If you are willing to wait, you will most certainly win.

When Ben Reynolds of Sure Dividend and I got to talking about sharing his wisdom with you all – I knew I needed to know his process.

I’m excited to share this guest post about the numbers he looks at when making a decision about buying a dividend stock.

Take it away Ben!

The financial world is filled with metrics and numbers of all kinds. The ‘basic’ Google Stock Screener has over 50 metrics to screen stocks. Other screeners have significantly more metrics.

The sheer number of financial numbers available can lead to paralysis-by-analysis. This article shows a way to quickly identify high-quality dividend growth stocks to invest in using only 4 different financial numbers.

Number 1: Dividend History

Dividend history is not a commonly used metric – and that’s unfortunate. Companies with long histories of paying rising dividends every year have historically performed very well.

The Dividend Aristocrats Index is an example of this. To be a Dividend Aristocrat, a stock must have paid increasing dividends for at least 25 consecutive years and be a member of the S&P 500. There are currently only 53 Dividend Aristocrats as of January 2019.

The Dividend Aristocrats Index has outperformed the market by 2.7 percentage points a year over the last decade according to S&P.

• Dividend Aristocrats 10 year annualized total return: 9.6%
• S&P 500 10 year annualized total return: 6.9%

What’s more, the Dividend Aristocrats have achieved these excellent returns with lower volatility.

• Dividend Aristocrats 10 year annualized volatility: 14.2%
• S&P 500 10 year annualized volatility: 15.2%

The Dividend Aristocrats have historically provided a rare mix of greater returns with lower risk. They tend to slightly underperform the S&P 500 during bull markets, and greatly outperform during bear markets. Returns in 2008 are shown below as an example:

• Dividend Aristocrats total returns in 2008: -22%
• S&P 500 total returns in 2008: -37%

In the recent bull market, the Dividend Aristocrats Index has slightly underperformed. It underperformed the S&P 500 by 0.2 percentage points in 2016, and 0.5 percentage points in 2015.

There is no one strategy that outperforms 100% of the time.

It’s important to understand why the Dividend Aristocrats have performed so well historically. For a company to have paid rising dividends for 25+ consecutive years it must:

1. Have a strong and durable competitive advantage
2. Have a shareholder friendly management

These are two very important characteristics when looking for long-term investments. I believe the Dividend Aristocrats Index has outperformed because of these 2 points. A long history of rising dividends is an indication of the two points above.

One of the most common objections to using the Dividend Aristocrats or other long dividend history databases is that it excludes high-quality businesses that don’t have as long of a dividend history (or don’t pay dividends at all).

And that’s a valid point. But the goal isn’t to find 100% of great businesses to invest in, it’s to limit our mistakes by investing where we know we can find great businesses. You don’t have to be right about every stock, just about the few you decide to invest in. Selecting from the Dividend Aristocrats Index makes it harder to make a mistake.

But there’s more to investing than ‘just’ investing in great businesses with shareholder friendly managements and holding for the long run.

Valuation plays an important part… And that’s what the next metric is for.

Number 2: Price-to-Earnings Ratio

The price-to-earnings ratio is calculated as the share price-dividend by earnings-per-share over the last 12 months. It gives a quick snapshot of how much you are paying for a dollar of earnings.

Another way of thinking about the price-to-earnings ratio is how long a company would have to be in business (and not grow) before it would be able to pay its owners back completely (if it distributed 100% of profits).

A company with a price-to-earnings ratio of 10 would take 10 years. A company with a price-to-earnings ratio of 20 would take 20 years. Obviously, the sooner you get ‘paid back’ in this example, the better.

All other things being equal, the lower the price-to-earnings ratio, the better.

Interestingly, low price-to-earnings ratio stocks have historically outperformed higher price-to-earnings ratio stocks. This is known as the ‘value effect’.

Low price-to-earnings stocks tend to have a cloud of pessimism surrounding them; there’s a reason they are cheap.

An excellent example of a cheap Dividend Aristocrat today is Target (TGT). Target is trading for a price-to-earnings ratio of just 10.5. For comparison, the S&P 500 currently has a price-to-earnings ratio of 25.8.

The reasons Target is cheap right now are:

1. Questions if it can compete with Amazon (AMZN)
2. Lower earnings guidance for its next fiscal year

This has scared many investors away. It typically isn’t easy to invest in low price-to-earnings ratio stocks. You have to be a contrarian – and buy when others are selling.

The reason low price-to-earnings ratio stocks tend to outperform over time is through changing investor sentiment. Target may not be in favor now, but that could change in the future. What happens when/if the company issues better-than-expected earnings, or a higher earnings guidance, or rapidly growing online sales? Good news will send the stock price higher.

For high price-to-earnings ratio stocks – like Amazon which trades at a price-to-earnings ratio of 188 – Good news is already ‘baked in’ to the stock price. If Amazon’s growth slows or it announces some other bad news, the investors that have piled onto the stock for ‘quick growth’ are likely to sell – and send the stock’s value plummeting.

Market darlings always fall to earth at some point. It is impossible for a company to grow at 20%+ a year indefinitely, or the company would eventually consume the world’s entire economy.

Low price-to-earnings ratios are preferred over high price-to-earnings ratios because lower price-to-earnings ratio stocks have historically outperformed. It’s always good to have the odds on your side.

Number 3: Dividend Yield

A long dividend history tells you if a company can sustainably grow over time, and survive (or thrive) through recessions.

A low price-to-earnings ratio tells you a stock is a bargain – that you are not buying into an overpriced security.

The next metric that matters is dividend yield. Dividend yield is calculated as a company’s dividends paid per share dividend by its share price. It is basically the ‘interest rate’ you get for owning the stock.

All things being equal, a higher dividend yield is preferable to a lower dividend yield.

A company’s dividend yield is dependent upon 2 items:

1. The company’s share price
2. The percentage of earnings a company pays out as dividends

If a company pays out $2.00/share in dividends, and it trades at a share price of $100, it will have a 2% dividend yield. Imagine you decide to hold off on buying because you only want 3%+ yielding stocks (for the sake of this example). If the stock price falls to, say $50 a share, the stock will now have a 4% dividend yield. If you buy at a 4% yield, you are significantly better off than if you bought at the higher price.

The second factor in a company’s dividend yield is what percentage of earnings are paid to shareholders as dividends. This is known as the payout ratio.

Number 4: Payout Ratio

A company simply cannot pay out more than 100% of its earnings to shareholders for long – or it will go out of business. You can’t pay money you don’t have.

The lower the payout ratio, the safer the dividend (on average), but the lower the dividend yield (on average). If a company has a payout ratio of 35% and earnings fall in half, it will still be able to pay its dividend. This is not so for a company that previously had a 90% payout ratio.

Low payout ratios also allow for a company to increase their dividends faster than earnings over the short-term. A company with a 35% payout ratio can double it to 70% (doubling dividends, assuming earnings are unchanged). A company that already has a high payout ratio cannot do so.

Additionally, the lower the payout ratio, the more money a company can reinvest in growth.

There are tradeoffs to payout ratios. The ideal stock would have a low payout ratio and a high yield. This is only possible if the price-to-earnings ratio is low.

Final Thoughts

Each of the 4 metrics help investors to identify high-quality dividend stocks with strong competitive advantages trading at fair or better prices.

Dividend history is arguably the most important as it helps to identify businesses with strong and durable competitive advantages with managements that want to reward shareholders with rising dividends.

The price-to-earnings ratio is used to find ‘bargains’ – or at least avoid overpaying for ‘story stocks’ that most grow at phenomenal clips to justify their valuations.

The dividend yield and payout ratio tell you how much income you will receive from a stock, and how much of the company’s income is going to shareholders.

The 8 Rules of Dividend Investing uses many of these metrics (and a few others) to identify high-quality dividend growth stocks suitable for investing for the long run.

Investors who stay disciplined and invest only in great businesses when they are cheap are likely to do well over the long run – if those businesses are held to compound your wealth over time.

Disclosure: I am long TGT.

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