Mar 172016
 

Start Compounding As Early As Possible

I recently came across a retirement guide made by J.P. Morgan Asset Management. It includes a nifty comparison between those who starts investing earlier vs later. The results show how time can play a significant part when it comes to compound returns. ūüôā

JPMorgan shows outcomes for 4 hypothetical investors who each invests $10,000 a year at a 6.5% annual rate of return over different periods of their lives:

  • Chloe invests for her entire career of 40 years, from age¬†25 to 65.
  • Lyla starts 10 years later, investing 30 years from 35 to 65.
  • Quincy¬†starts to invest early but stops after 10 years, contributing from 25 to 35.
  • Noah saves for 40 years like Chloe from 25 to 65,¬†but instead of being moderately aggressive he simply holds cash, term deposits, GICs or CDs, etc and receives a 2.25%¬†average annual return.

16-03-compound-interest-age-growth-time-investment

Let’s break down the results.

  • Chloe begins investing early, plus she’s consistent, which is why she has nearly $1.9 million at retirement. ūüėÄ
  • Even though Lyla started just 10 years later than Chloe, she only ends up with $920K, which means¬†postponing investing for just 10 years while we’re young will cost us almost a million dollars once¬†we’re old.
  • Quincy, who invests for only 10 years, still ends up with $951K at retirement, which is surprisingly more than Lyla’s portfolio, even though Lyla spends 30 years investing.
  • Finally Noah, who has a lower risk tolerance than the others,¬†ends up with only $652K at retirement even though he contributed for 40 years.

Of course no one can guarantee a 6.5% annual return. The¬†chart is for illustrative purposes only and does not represent a¬†real life investment plan. It simply demonstrates how annual rates of return and the passage of time can effect the outcome of a retirement portfolio.¬†The earlier we start investing, the better. ūüôā But just for fun, here’s a look at how the following asset classes performed over the past 10 years.

  • Canadian Equities – 3% annual return
  • U.S. Equities – 6%
  • Fixed Income – 5%
  • Canadian Real Estate – 12%
  • U.S Real Estate – 3%
  • Gold – 9%
  • Farmland – 12%

Depending on our asset allocation it’s possible to have made¬†6.5% annual returns with a moderately aggressive portfolio over the past 10 years.

Continue reading »

Aug 012013
 

Last year I wrote a post about the¬†power of having multiple income streams.¬†I advocated for the compound income phenomenon, which I think is very important for building wealth. If you’re not familiar with that article I recommend reading it first.¬†So far using multiple incomes have continuously benefited my personal finances so I’m pretty confident about this theory ūüėČ I wonder why I haven’t seen it written about in any economic or finance book I’ve read yet.

Since my last post I have acquired yet another source of income. Rent ūüėĬ†Buying property and then renting it out is a common way to make income for many other people. So I thought hey, why not give it a try myself. Late last year as many of you know I purchased some land and rented it to a farmer. Golly! I remember being all kinds of excited when I became a landlord, especially when I received my first rental cheque in the mail.¬†Such a wonderful feeling to receive money ūüėĬ†tumblr_mr_krabs_money_ultimate_source_of_joy_spongebob

You said it Mr. Krabs¬†(~_~) With the addition of a new land investment I now have a total of 5 income streams.¬†As I’ve illustrated previously, each of my incomes benefit one another and they all feed off each other’s synergy to create new opportunities. The newly acquired rental income is no different. I was already aware of the vast opportunities in the agriculture industry through the research I did when I bought fertilizer and farming related stocks like Potash Corp, and John Deere.¬†Then when I saw on the news that hedge fund managers were buying land in Saskatchewan it peaked my interest. So I did some research, most of which was just reading related articles on the internet with the help of Google. In the end I decided to buy a small parcel of land which planted the seed for my next income source ūüôā If I had not been a dividend stock investor I may not have even thought about pursuing this path and would not have any rental income today.¬† Continue reading »

Jan 092012
 
Earning side income is often touted as a good way to subsidize one’s full time job. The more work you have the more money you make. But there is a hidden benefit to it that is often overlooked called the¬†compound income phenomenon, which works like compound interest.¬†The more income streams you have, and the longer you keep them for, the faster your total income will grow. Below is a graph of my after-tax, monthly earnings from various income sources in the past 3 years (relative).
Full Time: Graphic Design related work
Part Time: Design related teaching job (hover mouse over the graph to see notes)
Dividends: Stock dividends from investment portfolio
Tutoring:  Private tutor lessons

      
¬† ¬† ¬† Over time, instead of a constant growth rate, there seems to be a shift towards geometric growth.¬†This all happened one step at a time, but it also occurred¬†very naturally.¬†Even though I’m working more now (about 50 hrs a week total), on an hourly bases, my income is still growing so that shows progress. The reason multiple incomes can accelerate each other’s earnings¬†is because the difference sources all work together to create mutual support, and maximize each other’s earnings power, as well as unlock any hidden potential faster.¬†

¬† ¬† ¬† For example, to sharpen my skills at my full-time job and grow my salary, I can use my part-time job to practice those skills. My part-time income will grow too because my full-time job gives me constant and relevant experience in the field so I can bring new skills to the table, which gives me an advantage over other teachers who may not have that extra industry exposure. My part-time job also gave me the experience to try private tutoring, and through my full-time job I made contacts and found my first student that way. As these earnings grow and I have more savings each month, it’s only natural that my rate of investing grows as well, which translates into more dividend income, which I can re-invest into tutoring supplies or back into dividend stocks. Each income stream builds on top of another. This synergy and compounding effect allow me to bring in revenue much easier and faster than a single job ever could, even with over time.
      
¬† ¬† ¬† I wouldn’t be as profitable at my part-time job without the experience of my full-time employment. I would have to drop my hourly tutoring fee if I didn’t have current teaching or industry¬†credentials. My dividend income wouldn’t increase as this rate if I didn’t have my other jobs and any savings. Separated, income sources are mundane and predictable. They can’t grow nearly as quickly. A job is a job. Work is work. But combine a few of them together, they can leverage off each other’s strengths, and you will have yourself a recipe for success!
     
¬† ¬† ¬† If you currently work part-time or even full-time, take a minute to consider picking up another income stream. Over time you too can experience the power of compound income. ¬†In another post I’ll explain how pretty much anyone can make some side income by tutoring. In a nutshell: Decide what you’re good at and post an ad online selling your knowledge.

—————————————————————
[edit¬†on August 1st, 2013] I have just completed a follow up to this post. I have procured another source of income and updated the chart ūüôā ¬†[/edit¬†]