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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: whatthezippos on July 10, 2016, 06:46:42 AM

Title: Earning dividends - investing question
Post by: whatthezippos on July 10, 2016, 06:46:42 AM
I've been reading MMM now and really enjoy it.  I had a question though, a few times he's mentioned investing in index funds and being paid dividends that basically create a source of passive income.  Just wanted to clarify, this differs from a 401k or other "retirement" savings, right?  I'm trying to wrap my head around this by mentally mapping out where one of my paychecks would go.

tl;dr my company does 401k matching of 50 cents on the dollar up to 2% of my salary, and I'm currently putting the 2% into a few low cost index funds.  I realize though that I can't touch the money until I'm 60 (and I dont think these funds have dividends anyway).  Am I correct in assuming I should be taking real money from my paycheck and investing THAT into funds that yield dividends?

It sounds so silly when I write it out, but maybe I'm just seeking a visual.

So lets say I net $4000 per month.  2% already went into my 401k and I can't touch that.  With the $4000 I pay my monthly bills - let's assume I have $0 consumer debt and no mortgage, so my monthly expenses are $1000 (bills, food, gas, etc).  Am I correct in assuming I would take the $3000 remaining and investing it into a fund like VTSMX or others that pay dividends?

Thanks everyone for the help
Title: Re: Earning dividends - investing question
Post by: johnny847 on July 10, 2016, 06:53:19 AM
First we should address the possible psychological fallacy here.

Many people when first inquiring about a dividend focused approach are misinformed about how dividends actually work. People like to think of their existing shares as a goose, and the dividends as the eggs. They don't want to ever kill the goose (sell their original shares) because then they would stop getting eggs.

But dividends are not free. On the day a dividend is issued, on top of the normal market movements, the share price drops by the amount of the dividend. There is no golden goose here laying eggs. Merely a goose dividing it self into more pieces (OK this analogy is getting weird now)

Secondly you should go read the stickied thread on investor alley titled how to access your 401k money before 59.5