With the rest offered by a holiday weekend, it can be hard to think about getting up early and starting the daily grind once more. At this time, after long summer holidays, that can seem less appealing than ever. That is why lots of people hope to retire early.
But retiring early takes money – which most of us get by working.
I think I could bring my retirement forward a few years by starting to invest in dividend shares today (or tomorrow at least, when the stock market is open again!) Here is how I would go about doing that with £180 a month.
Regular saving and discipline
A lot of people transfer money regularly without thinking about it, whether to pay bills or repay a debt. I think the same principle could help me invest.
If I was to set up a regular transfer, hopefully I would not notice too much £180 going out of my account each month. At around £40 a week, I think that would be an affordable amount for me. But – crucially – it is big enough that it could help form the basis of a long-term investment plan. That could help me retire early.
Dividend shares
Think of the companies you have interacted with today. They might be transport companies like National Express or petrol firms like Shell. They could be supermarkets like Tesco or Sainsbury. They might be leisure venues such as Wetherspoon or Hollywood Bowl.
These and many other companies deal with lots of customers day after day. If business is good, that ought to translate into profits. When it does, they can divvy some of them out to shareholders as dividends (the clue is in the name!) Dividends are never guaranteed, but some firms make regular and substantial payouts to shareholders.
By investing some of my money in such shares, I can build my own retirement portfolio. Over time, if the companies do well, their share prices may increase. That could boost the value of my portfolio. But crucially, if they pay dividends I will also have more funds to invest.
The miracle of compounding
That is right – I would reinvest the dividends.
It might be tempting to take them out as extra pocket money. But as my objective here is to retire early, the sooner I can grow my retirement portfolio to its target size, the earlier I can hopefully put my feet up.
That is where the miracle of compounding comes in. By reinvesting dividends, I can hopefully grow my portfolio value quicker. Imagine I invest £180 each month for a year in shares with an average dividend yield of 5%. After 15 years that should be worth around £4,565 thanks to compounding the dividends. If I just took the dividends out as cash, it would take me eight years longer to reach the same target.
How I’d start today to retire early
That example presumes constant share price and dividends. In reality that might not happen, although I think the illustration clearly shows the potential power of compounding in helping people try and meet their retirement goals early – and retire early!
But for that to happen, I need to put the plan into action. My first move would be to set up a share-dealing account and start investing regularly.
