Tuesday, March 17, 2015

Slow is Smooth. Smooth is Fast.

I certainly do not earn a six-figure salary.

And while I save close to 50% of my monthly income and dump it into the freedom fund, it does not seem to make a difference. The digits in my bank account get scrambled up and it displays a new set of numbers every month.

That's the only thing that happens. Or, so it seems..

In the beginning, it was exciting to see my net worth go from the negative to the positive zone. I recalled feeling on top of the world when I saw a surplus of $1000 in the bank.

Then it grew.

It grew from $1000 to $2000. From $2000 to $4000. And when it finally broke the $10,000 mark, I hardly noticed. In fact, it broke the $10,000 mark many months ago.

But even when that fact eventually sunk in, I did not feel particularly excited.

It could be that I had already anticipated it - because the system of consistently stashing away a large piece of your paycheck every month and growing it in a compounding mechanism is so simple. (Read - The Bucket System)

It's amusing to know that there are actually thousands of blogs out there dedicated to teach us how to save. The system is simple, but so damn easy not to do - it's so easy to procrastinate, it's so easy to say "Ok, I will do it, tomorrow...". 
It's so easy not to start doing something. 
That's why we have those awesome blogs on frugality. 

It is a system that is so simple to understand but yet so easy to give up halfway. After you take the first step, the system starts working in your favor. It works 24/7 to generate dividends for you.

Let that sink in for a while.... The system works 24/7, 365 days a year... no sick leaves, no excuses... no Thank-God-It's-Friday parties. 

But we condemn it...

We think a dividend-growth/index fund model is slow.

In fact, it really is slow. But only in the beginning.

Last year, when I first started purchasing dividend growth stocks, Coca-Cola sent me a cheque. My first dividend cheque came all the way from the US. 

My god..like a little kid and his new toy car, I was so excited I ran into the room, ripped the envelope apart to see a cheque.............. for $10.00.


I did not know whether I was supposed to laugh or cry. 

My first thought was, "Shit, this whole dividend shit's not gonna work!"

But deep down I knew that's not how the system works.

It starts slow, but gains momentum as it grows. It's like a snowball rolling down a hill. What starts out as a snowflake gathers more snowflakes. As it grows into a snowball, it gains more speed and gathers even more snowflakes. It gets bigger and bigger and gains more speed. Eventually, you'll see this giant snowball rushing down the hill at the speed of an avalanche, gaining even more speed as it gains in size....

Well, I can testify to that.

Last year I received less than $30 in dividends. This year, I'm all set to receive $500 in dividends by the end of the year.

Yea, I know that $500 is not a figure to be proud of. But can't you see that the snowball is gaining momentum? The dividend stream increased 16 times in one year.

If I can keep this pace up, I'll be looking at $1000 in dividends next year.

And we've not look at the capital gains yet. That deserves another separate post.

Understanding Compounded Acceleration

If you're a regular reader of White Collar Freedom, I'll assume that you're already well-versed with the 8th wonder of the world - compound growth. 

So I will not bore you with that.

Instead, there's something that I'd like to highlight here. Based on the following inputs:

Principal: $20,000
Monthly Deposit: $2,000
Growth %: 9.00

(all charts below are from: helpfulcalculators.com)

Over a period of 15 years, this is what the chart looks like:

Look at the first 5 years. Dividends grows like a snail.

Bloody demotivating.

In the accumulation phase, everything does not make sense - dividends received will be severely and significantly less than your total contributions.

But look past that.

See what happens from Year 7 onwards! The snowball gains momentum, total dividends received start to keep up with your total contributions.

In fact, based on my current lifestyle, Financial Independence occurs here:

Year 10:

By Year 10, dividends received a year would be somewhere around $30,000+. Which is enough for me to be FI.

At this stage, I'll have a CHOICE to decide whether or not I'd like to keep spinning that damn treadmill!

But here's where it gets interesting:

In Year 13, total dividends received is more than total contributions - the snowball catches up.

Curious to know what happens after Year 15?

*Bites pinky finger*....I present to you......WORLD DOMINATION.

Jokes aside, in 40 years, I'll be 65 years old and I wouldn't be complaining if the chart above becomes a reality.

Then again, it's easy to visualise all this behind the keyboard.

But I doubt it will vary much if I can consistently contribute $2,000 a month to the freedom fund, which brings me to the next point...

How Hard You Hit Matters

Now, the dividend-growth model only enters the 'acceleration' phase if you keep packing a solid punch every month.

If you're contributing 5-10% of your income towards the freedom fund, you'll probably achieve freedom in 50 years. If you're contributing 25% of your income, freedom is feasible in 30 years.

Now if you find a way to save 50% of your income and above, you're geared for acceleration. You're on the path of early retirement. We're looking to retire in 10 years, or less.

It's no easy feat to pack a hard punch (saving 50%) every month, consistently.

It's really not about saving a large chunk this month and splurging the next month.

It's about packing a solid punch, every month.

Of course, if you're earning a solid income like Gen Y Finance Guy (man...check out his income report), then you're poised for even higher acceleration.

"Slow is smooth, and smooth is fast..."

That's what it means.

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  1. The magic of compounding happens what appears to be out of no where. The lynchpin to compound growth is consistency. Its the small consistent contributions that don't seem to add up to much in the beginning, but as your chart shows with enough time you start to see some really significant gains (and dividends).

    Of course you can also inject some acceleration by increasing your income, thus increasing your contributions.

    Thanks for the shout out Josh.

    As you can see, I do have a high income, but its easy to let spending get out of control. I am not very frugal compared to others in the space. But income plays a starring role in getting to me my ultimate $10M net worth goal.

    Once we get past April I can really step on the accelerator when it comes to increasing that Net Worth figure. The goal is to increase it by $70K this year on contributions alone.


    1. Exactly, and that's why I do think that while it's important to be frugal, it's also equally important (if not more) to increase our income levels. Like you said, that's really "stepping on the accelerator".

      Looking forward to your increase in net worth this year :)

  2. And you're still early on, just looking at the planned projections. Wait until the weird 2nd order effects sneak in.

    For example, pro tip: Stop and look around somewhere near 25% to FI. You might find that wage growth, which is a common result of a maturing career, will significantly outpace growth in expenses if you keep your spending steady. That savings rate will creep upwards from 50% (to 72-76% in my case) causing exponential growth of an entirely different sort.

    1. That's an excellent and totally valid point Reepekg!

      That's really what I like about the system. It's not at all a linear growth pattern, but along the way, there are plenty of events that cause the curve to grow exponentially.

      It's dynamic and solid.

      Thanks for sharing your thoughts Reepekg!

  3. That graph is awesome. Really puts it in perspective. Investing is like dieting. Simple, not easy.

    We're over the 50% savings mark but that includes a lot of money going to the mortgage. My way of timing the market is that all extra funds go into the mortgage while it's soaring, and if the market tanks (I should define what I mean by this), then I'll switch it.

    Really, it's all good since we're putting a good amount into my 401k as is. Saving is the important part. Where it goes makes a difference but the impact of not spending the money in the first place is the real game changer.

    1. It's amazing isn't it Chris... Most people don't really understand compounding to its fullest extent.

      And the way that you're saving up and investing is gonna guarantee that you get that sweet little J-curve.

  4. I dont see your portfolio anywhere on the blog,..

  5. PROPS

    I love this -- especially the charts.

    You've nailed it. It's a slow start, but it gains momentum quickly. It took me freakin' ages to go from $1 to $10,000 in my porftfolio. $10,000 to $20,000 happened faster. $20,000 to $30,000 was almost easy. $30,000 to $40,000 practically saved itself... and so on.
    Part of it is habit, but a lot of it is serious growth. Nearly 1/5 of my portfolio is from interest, dividends, and capital gains and I've been investing less than 5 years.

    Money is magic.

    1. Hi Bridget, it's awesome isn't it? Money is certainly magic if we understand its fundamental rules.

      Here's to living life deliberately.


  6. I felt the same when I received my dividend, it was a measly $54, good thing I stuck to my plan and never got discouraged. I take it slowly, day by day, month by month, year by year until FI.

    Love the graphs!

    1. That's AWESOME FrugalitytoFinancialFreedom! Thanks for sharing and welcome to this little white space.