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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Sep 052015
 

Simple Tax Saving Tips for Anyone

People who work for either the CRA or the IRS often feel stressed out because their jobs are so taxing. ? Everyone has to pay taxes of course, but here are a few easy tax saving tips that you can use to minimize your tax burden.

15-09-easy-tax-saving-tips

  1. Income-split with your trusting spouse.
    It’s easy to shift the tax liability from a family member with a higher income to a family member with a lower income to reduce the overall tax a household has to pay. 🙂 Opening a joint non-registered account allows couples to income-split any capital gains down the road, which can save a lot of tax money if one spouse earns more than the other. And if anything happens to one person, the other person takes over the entire account with no messy legal or estate business. A spousal RRSP strategy can also achieve similar results.
  2. Earn more money from investments, instead of working.
    Capital gains and dividends are taxes less than active income such as from salary or wages. For example, in Canada, you can make up to $50K a year without paying any income tax, 😉 as long as all your income comes from eligible dividends. This is why it’s so important to prioritize investing over spending, especially at the beginning of someone’s career. Once an investment portfolio is large enough it will have enough momentum to continue growing by itself without any more additional savings. A job delivers high-risk income because it’s relatively common for jobs to be lost, along with the income. But investment gains, on the other hand, are low-risk. Counting on a steady stream of dividends in a diversified portfolio is much more reliable than relying on income from work or from running a single business.
  3. Make use of tax-advantaged accounts.
    401(k) and IRAs can be used by Americans to shelter their taxes. In Canada, the best vehicle we have is the Tax-Free Savings Account (TFSA.) The combined TFSA contribution room for a couple is $82,000 today. That is more than enough to invest in a broad range of low-fee index funds, where the future gains won’t be taxed. 🙂 If you manage to max out all your TFSA room, or if you’re a high-income earner with 140K+ salary, you have up to $25,000 of contribution room in your RRSP for just this year alone. Max out all your tax efficient vehicles before buying stocks, bonds, or ETFs in a regular cash (or non-registered account.)

By using just the 2nd and 3rd tips in this post, I save more than $5,000 of income tax every year. A little planning can go a long way!

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Random Useless Fact: 

15-09-body-language-tip-fact-toes

Apr 142013
 

It’s almost been 5 years since I started this journey to financial freedom. How am I doing so far? As shown on the right side bar I’m making about $5,100 of dividend income a year 🙂 Which is only about 20% of my annual living expenses. So it appears I still have a long way to go but I feel good about the future 😀 One thing I could do to reach financial independence sooner is downgrade my lifestyle just a little bit. Right now I live in a large two bedroom apartment, and drive a pretty sweet car. But I realize I don’t need these things to be happy. So I thought to myself what if I lived a more modest lifestyle? Let’s see what this alternative life for me would look like.

Passive Income: $6,500

In order to make life simpler I plan to pay off all my debts. I don’t have enough cash in the bank to do this. Big surprise lol 😉 So I’m going to sell my home, car, Saskatchewan farm, gold and silver, and all other financial assets, except my stocks. After fees, commission, and taxes, the total amount resulting from a complete liquidation of these assets should be about $425,000. So after paying off all my $390,000 of debt I will have $35,000 left over 😀 If I put this all into a diversified portfolio of dividing growth stocks with an average yield of 4% I’ll be making an additional $1,400 a year. Combined with my existing $5,100 mentioned earlier, my total passive income would be $6,500. 

Expense: $12,000

So where am I going to live if I sell my apartment? Thankfully there are many affordable places for rent in the Greater Vancouver area. I don’t mind living in a smaller place. It’s not like I’m using the entire 800+ sqft space in my current apartment anyway. Since I have no car anymore I’ll be taking public transit to get around. It’s more green anyway 😉 Here’s what my new spending would look like.

 13_04_modestlifestyle

Conclusion: $6,500  / $12,000 = 54%

And just like that, if I were to do this today I would already be half way to financial freedom. Woot! Big jump from 20% eh. Who knew just changing a couple of things can have such a big impact on expenses. Besides housing and transportation there wouldn’t be any noticeable downgrades compared to what I have today 🙂 Holy hamburgers, $6,500 of annual dividend income by investing for the last 5 years means in 5 more years I can probably make $13,000 of passive income and actually retire for real.  What an exciting thought! 5 more years. Instead of freedom 35, I can probably get there by 30 🙂 All I have to do for now is liquidate my assets, pay off all my debt, and downsize a bit. It’s almost hard to believe that people can spend just 10 years of their lives in the rat race and then retire forever by diversifying their investments and living with low expectations, yet the math totally works out. Does that mean I’ll aim for freedom 30 now?

net worth, freedom 35

Of course NOT 🙂 Although I would certainly enjoy the simple lifestyle of living on a modest income with no debt to worry about, the reality is not so simple. I want to get married some day so a 1 bedroom basement suite probably won’t be enough eventually. There’s also the possibility of having children, and caring for aging parents. I have to look past my selfish desires for freedom and plan for loved ones to be included in my future life beyond financial independence. So selling my apartment, farm, etc right now is probably not the wisest plan to build long term wealth eh? 😉

Nevertheless it’s very reassuring to know that if I became unemployed tomorrow I should have a pretty good financial cushion to fall back on. This sense of security is more important to me than going on extravagant vacations or leasing a new Lexus, and is also why I will continue to invest my savings and use financial leverage to build up even more passive income! I was talking with my realtor last week and he said the farm I bought last year with $20,000 of my own money has appreciated by $10,000 already, which makes for a 50% return on investment so far (゜∀゜) Check back later this month as I’ll update the official numbers on my blog when the FCC publishes their semi-annual farmland value report. This is why investing rules! Luckily the kinds of assets that I’m heavily invested in like stocks, housing, and rural land, have all performed relatively well over the last 5 years especially in North America 😀 But how will my luck fair in the next 5 years? We’ll just have to wait and see 😉