Apr 172017
 

A Present To Yourself

If you like to receive presents, and let’s be honest – who doesn’t? then consider giving yourself the gift of long term planning. That simply means making a plan today that will pay off dividends for you later on. Your future self will thank you for this priceless gift that you have given him or her. And best of all, making this gift doesn’t cost you any money today. 🙂

Last month, Amazon.com founder Jeff Bezos surpassed Warren Buffett to become the 2nd richest person in the world! How did he do it? Maybe a letter he wrote to shareholders in 1997 can reveal some secrets. 😀 In it Jeff writes that we can’t realize our true potential as people or as companies unless we plan for the long term. “If everything you do needs to work on a 3-year time horizon, then you’re competing against a lot of people,” Bezos told Wired in 2011. “But if you’re willing to invest on a 7-year time horizon, you’re now competing against a fraction of those people, because very few are willing to do that.”

Year 7 of the 12 Year Journey

I started this blog in 2010 with a 12 year plan to reach financial independence. It’s now been 7 years and things are progressing very well. 🙂 Back in 2013, my net worth was only $200K. And my financial details looked like the following.

Assets:
Home = $252K
Farms = $325K
Liquid investments (Including Retirement Accounts) = $161K

Liabilities
Total debts = $535K

At that time I wrote about my plans and my course of action to reach financial freedom. Without a solid plan back then, I wouldn’t be where I am today. Developing a strategy years ago was the best present I could have given my current self.

Speaking of the present, we are now only 5 years away from 2022. My net worth is currently about $610K, and here is an update of my financial details today.

Assets: 
Home = $270K
Farms = $436K
Liquid investments (Including Retirement Accounts) = $400K

Liabilities
Total debts = $495K

It appears I’m farther ahead that I initially planned for. This means I have to adjust my original plan made a few years ago. Not that I’m complaining. 😀 So here is my new revised plan for Freedom 35:

Step 1: Pay down $18K of debt per year. After 5 years my total debt should be $400K.
Step 2: Sell all farmland in 2022 for $436K. After agent fees and tax, I would keep $400K in my pocket.
Step 3: Use the $400K from selling farmland to pay off my $400K of debt. This would make me debt free.
Step 4: Re-balance my $400K liquid portfolio to earn $15,000 per year of dividend income.
Step 5: Live on passive income for the foreseeable future.

That’s pretty much it. 🙂 A $15,000 income from a $400,000 portfolio represents a sustainable 3.75% withdrawal rate.

Here is a look at my projected monthly expenses after I reach financial independence in 2022, assuming 2% annual inflation rate from today.

  • 300 – strata fee
  • 30 – gasoline for car
  • 100 – car insurance
  • 30 – home insurance
  • 100 – property tax
  • 70 – internet
  • 40 – cell phone
  • 300 – food
  • 30 – electricity
  • 250 – discretionary

Total monthly spending = $1,250

Discretionary spending will be clothing, entertainment, and other things like that. I won’t have to pay into the MSP healthcare system anymore because I wouldn’t be making enough income to be charged the monthly insurance premium. I also don’t have to move to a small city or change my lifestyle. I can stay in YVR. 🙂

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Apr 132017
 

Farmland Update – Small Price Increase

Farm Credit Canada just released its annual Farmland Values Report which provides a yearly overview of provincial and national land values trends across the country. As usual, it is this time of the year that I adjust the value of my Saskatchewan farmland using the average change of this report and the inflation rate (CPI.)

Unfortunately farmland values in east-central and southeast Saskatchewan remained unchanged in 2016. This is where my plot of land is. The FCC report points to the oil and gas industry slowdown as the main reason for the lack of appreciation. However, other parts of Saskatchewan did see increases. 🙂

There was 0.00% increase in value to my farmland according to the report. The overall inflation rate in Canada was 1.43% in 2016. The average of these two numbers is 0.715%. Therefore I will be adding $3,000 to my farmland value from $433,000 to $436,000 in my April net worth update. 🙂

Ever since I started to invest in farmland, the FCC reported values is SK have always appreciated faster than CPI. This is the first year where the inflation rate has surpassed that of the annual FCC report.

Despite the stagnation in some parts of Saskatchewan, the overall appreciation in Canadian farmland was pretty good. Each province saw positive growth in aggregate, and the average increase across the country was 7.9% for 2016.

Luckily my farmland operation is profitable and I have a rental contract for the next 2 years so I am not too concerned that my farmland did not appreciate in 2016. I just hope it retains its value for the next 4 years, at which time I will probably sell it to free up capital for other, more liquid investments.

I bought my farmland in 2012. If I had to grow my own crops I would probably start with fruit farming. I think I would be berry good at that. 😀 But for now, I am happy just being a landlord.  My tenant always pays on time and the land’s value has gone up a lot so far.

But as we can see, the growth has been slowing since 2013. I believe the hay-day of farmland investing is behind us. Interest rates can’t go much lower than it already is. A weakening of the Canadian dollar and more foreign investments can spur a little more growth in the farmland market, but it’s not a guarantee.

 

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Random Useless Fact:

Domino’s has over 8,000 stores across 82 countries, making it the 2nd largest pizza chain after Pizza Hut.

Apr 102017
 

To get the most out of our spending we can take advantage of consumer surplus. A consumer surplus occurs when we, as consumers, are willing to pay more for something than the actual market price. For example, I pay about $50/month for parking at work. Since I drive to work everyday, being able to use the parking lot is fairly important to me. Given how essential this privilege is, I would be willing to pay up to $125/month for parking. 🙂

The difference between how much I value the parking space versus how much I actually pay is the consumer surplus, which is $75 in this case. If the cost of parking was over $125/month however, then I would take public transportation instead of driving to work.

In order to increase our perceived wealth and live a richer life, we should try to allocate more of our spending towards products and services that will bring us greater marginal benefit.

Here are a couple of ways to increase our consumer surplus:

  • Practice mindful spending.
    Lots of people buy clothes, exercise equipment, or magazine subscriptions often on impulse. But realize after awhile that they don’t actually use those things very much. We should minimize buying things that won’t give us a consumer surplus. We have to know ourselves and take some time to consider how much utility a product will give us not only at the moment of the purchase, but also in the future.
  • Earn more money.
    The more income we make the more affordable things will be for us, relative to other consumers. A taxi ride to the airport may seem expensive to someone making minimum wage. But the same fare would be pocket change for an engineer making $140,000 a year. My cell phone plan was $40/month 10 years ago. That seemed expensive to me as a student. Today, my cell phone plan is still $40/month. But I would be willing to pay $300/month for it. So my consumer surplus is $260, making it an excellent deal for me.

Consumer Surplus in Everyday Life

Some people complain we have expensive telecommunication services here compared to other countries. This is true, but measured from a consumer surplus perspective the cost of internet and phone services is not that bad. 🙂 Evaluating a product based on what other people are willing to pay for it is natural. But it puts us at risk of buying something not very useful or enjoyable to us. Here’s a joke to prove this point.

Husband: I just bought this bag of dog food for 90% off. I couldn’t pass up such a great deal!
Wife: But we don’t have a dog.

We all have different values and interests. So if we spend money with a higher priority on maximizing consumer surplus then we can enjoy more bargains in life. 🙂

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Random Useless Fact:

Apr 062017
 

A New Way to Measure Your Success

There are varying degrees of success and many different ways to define it. For example, in order to be a successful frequent flyer, you will probably need a lot of connections. 😀 And if you’re trying to lose weight, success is all about mind over platter, and winning that Nobelly Prize. 😄

how much do you value your free time?

Financial success is often evaluated in terms of income or wealth. But I often argue that time is our most precious resource. Unlike money, all our days are numbered. So given this reality, perhaps the best way to evaluate our success is to find out how much we value our free time. 🙂 This can be done with the following steps.

  1. Think of an activity that is neither pleasant nor unpleasant to do for you. It also can’t help you gain skills or make you smarter.
  2. Determine the minimum amount of money you would charge to perform that service for 1 hour for a stranger.

This mental exercise will reveal how much you value your time at an hourly rate. 🙂 For example, services I can provide that I neither like nor dislike include slowly folding laundry and walking around town for no reason.

I would have gladly accepted $20/hour to fold laundry 10 years ago. But things have change now. I would not give up my free time for any amount less than $40/hour today, because I can offer valuable skilled labour. Furthermore, I’m 10 years closer to death so there has to be an added premium on the remaining time I have compared to the past me. Due to simple economics, the fewer days I have to live, the more valuable those days are to me.

In a way, $40/hour is an indicator of my level of success in society. Perhaps a doctor or lawyer would value their free time at $120/hour. This wouldn’t be surprising given their place on the social economic ladder. It is not only a measure of their immense human capital compared to mine, but also their financial status.

How the Value of Time is Tied To Success

As self sustaining adults, the value of our free time should be the lowest at the start of our careers. But over time this value should increase to keep up with our growing human capital. Over time our demand for time is increased, and demand for money is reduced because we can earn money easier and more quickly.

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Apr 032017
 

When Long Term Planning Works Out

Thanks to my recent investment in Lending Loop I am now making an additional $2,000 per year of interest income. This brings my total passive income to $24,000 per year. Sweet peaches and cream! 😀 Here’s a breakdown.

  • $9,000 dividends
  • $9,000 rent
  • $6,000 interest

Passive income is the best kind of income for 3 important reasons:

  1. It’s stable and requires no effort from the investor.
  2. It has the capability to be tax efficient, eg: by earning it inside a tax advantaged account.
  3. It’s inflation protected. eg: My current passive income from dividends, rent, and interest would all increase under inflationary pressure.

But it takes time to build up $24,000 of annual investment income. Rome wasn’t built in a day, and neither is passive income. It took me about 9 years of saving and investing to reach this milestone. Dividend income was my first passive income stream and it’s starting to really pay off now. 🙂 Many other bloggers are using this popular strategy for early retirement as well.

My current level of passive income by itself is still not enough for me to live on. However, my projection is to grow my passive income by $3,000 per year over the next 5 years so I will be financially independent when I’m 35 years old in 2022, making about $40,000 per year from my investments. 😀

Increasing my passive income by $3,000 a year is actually easier than it sounds due to my special circumstance. I have 3 lucky advantages that most people my age don’t have.

  1. I have over $1,000,000 of investments under my control. Dividend growth stocks increase payments to shareholders over time. Land tends to appreciate in value and extract higher rental income in the long run. Through inflation this $1,000,000 asset portfolio will grow by an estimated 2% a year to keep up with the cost of living. This works out to $20,000 of annual appreciation. We can easily convert any tangible asset into a perpetual passive revenue stream by using the 4% rule. Therefore, I can expect my passive income to increase by $800 by next year simply by continuing to hold $1+ million of productive assets. ($20,000 x 4%)
  2. I do not spend the $24,000 of passive income I currently make. So all of it can go back into buying more investments. $24,000 will generate about 5% of income for me with a combination of high yield income securities and dividend stocks. So that’s another $1,200 of newly created passive income for me to look forward to by next year. ($24,000 x 5%)
  3. Tax efficiency. Nearly all my dividend producing investments qualify for the federal dividend tax credit so I effectively pay only 6% tax on the income they produce. My rental income is offset by my mortgage interest so I pay less than 4% tax on this rental income. As I’ve written about in the past my profits are kept low. Nearly all my other passive income are sheltered in my RRSP and TFSAs, which accounts for more than $150,000 worth of stocks, bonds, mortgages, and other interest producing assets. This means I pay minimal tax on the $24,000 passive income I make.

Due to the 1st and 2nd reasons in the above list, my passive income should grow organically by $2,000 every year without me injecting any new capital into the portfolio. The remaining $1,000 of passive income (to make up my $3,000 increase per year) will come from savings. With an expected 5% income rate I will need to save $20,000 per year on average to make this happen. I think that’s a reasonable goal for me. 🙂

This whole plan all started in 2008. I’m just following through with it now and adding small changes as things move along. What truly amazes me is the fact that my passive income has now reached a point where it is growing at a faster rate than my active income. There is no way I can sustainably increase my salary and wages by $3,000 every year without sacrificing my health and risk getting burnt out. But my passive income can. 😀 This is why investing becomes more effective the longer one does it.

 

Liquid’s Financial Update

*Side Incomes:

  • Part-Time = $700
  • Freelance = $800
  • Dividends = $700
  • Interest = $100
  • SolarShare bonds = $500
*Discretionary Spending:
  • Fun = $500
  • Debt Interest = $1200

*Net Worth: (MoM)16-12-networthiq_chart-nov

  • Assets: = $1,097,900 total (+9,500)
  • Cash = $2,200 (+700)
  • Canadian stocks = $145,700 (+7500)
  • U.S. stocks = $90,100 (-700)
  • U.K. stocks = $19,600 (+300)
  • RRSP = $76,400 (+1500)
  • Mortgage Funds = $30,800 (+200)
  • Peer-to-Peer Lending = $20,300 (+200)
  • SolarShare Bonds = $9,800 (-200)
  • Home = $270,000
  • Farms = $433,000
  • Debts: = $495,200 total (+800)
  • Mortgage = $184,300 (-500)
  • Farm Loans = $190,300 (-600)
  • Margin Loans = $62,800 (+3200)
  • TD Line of Credit = $14,800  (-600)
  • CIBC Line of Credit = $26,500 (-500)
  • HELOC = $16,500 (-200)

*December Total Net Worth = $602,700 (+$8,700 / +1.5%)
All numbers above are in $CDN. 

I got my first SolarShare bond payment! This is the first of 30 total payments I will receive over the next 15 years.

Much like black holes, climate change can really suck. 😄 I invested in SolarShare last year because I wanted to make the world a greener place and earn a profit while doing it. 😀

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