My Strategy For The New Stocks and Shares ISA 4

When it comes to Investing and Saving, I cannot believe how lucky we are in the UK. We have an account that lets you invest and save money completely tax free. And unlike a pension, you can withdraw the money at any age you like. Yes, I am talking about the Investment and Saving Account (ISA).

I do most of my investing these days using an ISA account. No capital gains tax to pay and no dividends tax to pay. Without these expenses I can let more of my money compound for longer. Every year, each individual can put a set amount into an ISA account. Over the past few years the amount has been £15,240. But from the current tax year which starts today, the amount I can put in to an ISA has increased to £20,000 per year. And I intend to make full use of each.

Regular readers will know that I am a dividend growth investor. I want to grow my dividends to a level where it covers all my expenses. This way I can be financially free and not have to work if I don’t want to. I have been making use of ISAs for just over 2 years now and the dividends I receive in this account is currently £1,420. It has been hard work but I can tell you it is worth it. Every time a dividend hits my account I keep thinking that I should have started investing sooner. But I am happy with where I am today. Have a read of how I made my first £1,000 in annual dividend income to see the the stocks I bought and how much they pay me each and every year.

By investing in high quality blue chip companies, the £1,420 I currently receive in dividends each year is a good building block. The aim is for me to reach £2,500 this time next year. I will do this by investing the full £20,000 ISA allowance this year as well as just over £1000 in cash I have from the previous years ISA. The beauty of dividend investing is that I will collect £1,420 over the year which I can chose to do as I will, in this case invest it in more dividends. £2,500 in annual dividend income does not seem like so much of a stretch now.

If anyone out there is thinking about opening a stocks and shares ISA or just a normal dealing account, I would say do it. Long-term investing is the surest way to become a millionaire. Have a read below for more motivation on why you need to take control of your finances and start investing. There is even a section for those who think they just don’t have enough money to save or invest.

My 3 Principle Wealth Strategy

From reading hundreds or investment books and articles and listening to countless interviews and podcasts, I have learnt that building wealth via investing is easy. It all boils down to 3 key principles:

Live below your means and accumulate capital, or cash reserves, especially when it seems everyone is optimistic about the market
Be patient and only buy stocks when selling below their intrinsic value
Purchase income-bearing, or dividend-paying, stocks that can maintain that cash output during downturns

It is really that simple. The problem is in investing smile is really hard to follow. People assume that to make money, you need to have a complex strategy. But the evidence points otherwise – the simpler the strategy the better. Warren Buffet preaches this over and over agin.If you are new to investing, these are great rules to live by. For veterans, they provide a great reminder.

1.Live Below your means and accumulate capital

Spend Less than you earn and invest the difference. It is really this simple. Thankfully, I have always been a good saver so this comes to me naturally. I am also thankful for learning the power of compounding at an early age and this has given me added motivation to fill out the full tax free ISA amount of £15,240 (raising to £20,000) a year. More on how I am able to invest half my earnings below.

2. Patience

The hardest thing for most investors to exercise – including myself – is patience. It can be all too tempting to deploy capital when markets are rising because you do not want to miss out on what everyone else is excited about. I have been accumulating a cash position over the past few months despite the emotional push otherwise. If you haven’t studied Warren Buffett, I highly recommend studying any and everything about him because he is a case study for how to be patience and invest opportunistically.

Read my article on cash and market psychology to understand the importance of being patient and not just clicking the buy and sell button at will. `

3.Invest in Consistent Cash-Producing Businesses

I do realise that different people have different investment strategies. For a total return investor, dividends are not the most important consideration.However, the lesson I took away from this is that whether you invest solely for income, capital appreciation, or both, you want to invest in businesses that have the capabilities to produce strong cash flows regardless of the market cycle. The cash flows of companies such as Unilever, Experian, or Reckit Benckiser will be less affected by market downturns than companies like Lloyds Banking Group, BHP Billiton, or International Airlines Group. That doesn’t mean that the latter are not excellent companies. However, their ability to distribute cash productively may be constrained by cash flow reductions during draw-downs, something that does not affect the former as drastically.

How I Can Afford To Save and Invest The Full ISA Amount Each Year

I often get asked questions along the lines of “how can you save and invest £15,000 a year?” or “how can you afford to fill out the full ISA allowance each year?”

These are perfectly legitimate questions considering I only earn just above the average UK wage. No I am not wealthy and I’m sure as hell not being subsidies by my parents like most millennials are today. I take pride from working extremely hard for everything I have.

The truth is, I am able to save large chunks of money through perseverance, planning, self-control, taking on side hustles, and not frivolously spending money on unnecessary junk. That’s it. That is the secret.

You see, I identified my primary passion, and I ruthlessly prioritised my life decisions to serve that passion.When You Really Want Something, You Put It Above Other Things You Also Want.

My primary passion being financial freedom and in order to get there, I need to build my passive income. Having taken the dividend income route to build this passive income, I need to prioritise saving and investing above all else to reach my goal. This doesn’t mean I am extremely frugal or a miser. I still enjoy life and do the things I want to do. It just means that I think twice before making foolish purchases. It also means that I need to earn extra money outside my job in order to keep pushing towards my goal. There are lots of different ways you can make some extra money so if this option doesn’t sound that appealing then take a look at this article on european business review to find some other options.

I was recently speaking with a friend who was curious as to how I could save 50%+ of my taxable income. This colleague is a huge travel junkie who loves to travel to new places. When I told him that saving involved seriously cutting back on travel, he balked – it wasn’t something he believed he could do. This is because his priorities are discovering new places and exploring what this world has to offer. My friend really enjoyed the concept of financial freedom, but he didn’t love it enough to sacrifice his commitment to travel.

I find the willpower to put money aside for my ISA and other savings and investments account just like my friend finds the willpower to put money towards plane tickets. In this moment, what matters most to me is saving money so that I could invest in quality companies. And so, in my daily and long-term decisions, this goal takes precedence over my other lesser goals.

You can always hack the system to save and invest more

There is always a solution out there to achieving your goals, but when it’s not obvious, you have to get creative.

In order to invest more money there are two levers you can pull. Save extra money or Earn earn money. To some people, saving money comes easily and this is the route those people should take.

For the countless people who find saving money a chore, the best thing to do would be to earn more money and transfer those extra earnings straight to your investments accounts. This does not necessarily mean that you need to get a promotion at your current work. There are so many ways to earn more money I have written a whole host of articles on this. For me, the main ways I earn more money is by letting my apartment out on Airbnb and selling my stocks list. This goes a long way in helping increase the amount that I have available to invest (remember that when your earn money through your side hustles, it is taxable so look in to this aspect as well).

My advice for those looking to gain financial freedom, or pursue another passion, is to identify your goals and organise your life around creating opportunities to pursue them. Rather than focusing on what you cannot do, recognise what you love and are willing to make sacrifices for. Anything that you want in life requires discipline, sacrifice, and passion. If you are able to put your goal above all else, it is only a matter of time before you achieve it.