Jun 012018
 

Next week is Tax Freedom Day! This is the first day of the year in which Canada has earned enough income to pay its taxes. Every payment to the government of all levels that is officially considered a tax is counted. The purpose of having a tax free day is to provide tax paying citizens with a metric with which to estimate their “total tax bill.” 🙂

Tax freedom day is unique to every country. For example, it’s June 7th in Canada because 43% of all income earned by Canadians goes to tax collectively. But in the United States, it falls on April 24th because of a lower 31% tax burden.

How to calculate your personal tax freedom day

To determine our own tax freedom day we need to calculate our tax burden percentage. This can be done by adding up all the tax we pay to cities, provinces, and the federal government. Some forms of tax like tariffs are out of our control. But here’s a list of typical taxes I pay every year, and how much I pay into them relative to my gross income.

  • Income tax – 14% (Federal + provincial)
  • Payroll tax – 4% (employment insurance, state pension premiums)
  • Sales tax – 2% (GST/PST, consumption tax)
  • Property tax – 3% (apartment and farmland)
  • Other surcharges, excise tax, environmental levies, and duties – 5% (tax on alcohol, electronics, gasoline, etc)

So as it turns out my tax burden percentage is about 29%. This is just a rough estimate. But it means in a 365 day year, my tax freedom day would be around mid April. 🙂 It used to be in May, but I’ve managed to lower my tax burden over the years. Despite earning a high income, I’ve learned to pay relatively low taxes. My goal is to eventually drop my tax burden to 25% of my total income. 😀

Here are some strategies I’m using to keep more money in my own pocket.

  • Max out my retirement contribution (RRSP) every year. In 2017, I effectively lowered my taxable income by $12,000 this way, saving me over $3K of income tax.
  • Earn business income. Instead of accepting income as an individual, I use a small business when conducting freelance work. This way I can spend money on business related expenses first, and then pay taxes on whatever profit is remaining.
  • Learn to cook. Prepared meals either from the supermarket or restaurant are marked up with a sales tax. Basic groceries, meat, and produce are exempt from tax.
  • Efficient commute. My city has the most expensive gasoline in North America. It broke records a month ago at CAD $1.62/Litre, (USD $4.72 per gallon.) A big reason for this is taxation. There’s carbon tax, motor fuel tax, and public transportation tax all built into the price of gas at the pump. I recommend either live closer to work, or take public transit. My car only gets driven about 5,000 Km per year.

Taxation is a major living expense for everyone. But luckily there are aspects of it that we can control and reduce. 🙂

 

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Random Useless Fact:

Jan 122017
 

What’s 6 inches long and gets Kim Kardashian excited? That’s right. It’s money. 😀 Especially the one with Benjamin’s face on it. There is certainly no shortage of liquidity in the world today thanks to central banks. As investors, our priority is to increase our expected returns while reducing our anticipated risks. A good way to go about doing this is by setting goals. Making smart decisions and taking appropriate action is easier if we have defined a target to aspire to. 🙂 If we don’t take control of our money, then someone else will inevitably try to use money to control us.

Here are my financial goals for 2017.

  • Grow my TFSA to $80,000.
    I currently hold $72,000 across all my tax free savings accounts. I have $3,000 contribution room remaining for the year. All the investments inside my TFSAs have performed well, except Bombardier stocks BBD.B. Overall I’ve been quite lucky with my stock picks. 🙂
  • Grow my RRSP to $100,000.
    I currently hold $86,000 in my RRSP. I have $10,000 contribution room remaining for 2017.
  • Grow my net worth to $750,000.
    I hope to grow my wealth by $180,000 this year. $60,000 of this increase could come from savings and debt reduction. The remaining $120,000 would ideally come from investment returns. 🙂 This isn’t an unreasonable expectation considering last year’s market performance, and I currently have over $1 million worth of assets.
  • Increase my passive income rate by $2,000/year.
    I plan to invest at least $35,000 into a mix of fixed income securities and dividend stocks. The average yield on new investments would be 4% to create $1,400 of new passive income per year. The remaining $600 growth should come from dividend increases from investments that I already have in my current portfolio.

That’s pretty much it. As usual, the likelihood for me to reach my goals will depend on many factors, including how the financial markets perform which is largely out of my control. We’ve had a great Q4 in 2016 to finish the year on a high note. But who knows how this year will turn out. Setting goals is important because it gives us something to focus on and look forward to. It guides our behavior so we feel a sense of purpose when making financial decisions. 🙂

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Random Useless Fact:

There’s a man in east India who has 39 wives, 94 children, and 33 grandchildren so far. They all live in a 100 room mansion. It takes 30 whole chickens, 132lb of potatoes, and 200lb of rice just to make a family dinner.

 

Apr 072016
 

Market Bounce

Woohoo! Investors can rejoice as March 2016 was one of the best months for the stock market in recent memory. The S&P 500 and Dow Jones gained 6.9% and 7.1% respectively. Even the commodities-heavy S&P/TSX Composite in Canada managed to end the month 4.9% higher than it started. What do all these numbers mean? Well let’s pretend to be architectural drafters for a moment so we can put things in perspective. A broad North American equity index fund portfolio worth $250,000 would have returned about $15,000 during March. That’s not too shabby at all. 🙂

16-04-stock-performance-march-tsx-2016

I made a couple of new investments in March, such as buying Air Canada bonds in my RRSP, and adding more Antrim MIC units to my existing holding in my TFSA. In other news, as many people already know, earlier this year Suncor reached a $4.2 billion deal to buy out Canadian Oil Sands. My COS shares were finally tendered in March. This means my 123 COS shares were replaced by 34 new SU shares. 🙂 This brings my total Suncor holding to 200 shares, or $7,200 in market value. Wow that’s a high concentration of money in just one stock. Thankgoodness Suncor is a high quality company. 😀

*Side Incomes:

  • Part-Time = $800
  • Freelance = $500
  • Dividends = $600
  • Interest = $200
*Discretionary Spending:
  • Fun = $200
  • Debt Interest = $1300

*Net Worth: (MoM)16-04-stock-fiscal-update-networth

  • Assets: = $948,000 total (+17,400)
  • Cash = $2,500 (-5000)
  • Stocks CDN =$110,100 (+8100)
  • Stocks US = $69,400 (+900)
  • RRSP = $69,100 (+6,300)
  • Mortgage Funds = $22,900 (+7,100)
  • Home = $263,000
  • Farms = $411,000
  • Debts: = $490,300 total (-4,300)
  • Mortgage = $189,600 (-400)
  • Farm Loans = $196,400 (-500)
  • Margin Loan CDN = $28,400 (-100)
  • Margin Loan US = $25,900 (-3,700)
  • TD Line of Credit = $21,000  (-600)
  • CIBC Line of Credit = $11,000 (+1000)
  • HELOC = $18,000

*Total Net Worth = $457,700 (+$21,700 / +4.98%)
All numbers above are in $CDN. Conversion rate used: 1.00 CAD = 0.77 USD

Thanks to the large gains in the markets my net worth almost increased 5%. Furthermore, it’s another month where I earned over $2,000 from side incomes. 🙂 My dividends and interest payments are getting bigger each quarter! But it’s no big deal. All I did was consistently invest in dividend growth stocks and high interest fixed income securities for the past 7 years.

But is this recent market rally sustainable or is it on borrowed time and we’re past due for a correction? I think it doesn’t hurt to be cautious when stocks are trading beyond their fundamentals, so I’m preparing for a potential pull back by keeping some cash around. My immediate plan for April is to save more money, pay down some debt, and fight any urge to buy a new stock that happens to catch my attention. I realized that I should probably divest away from the stock market a bit as it’s taking up too much of my asset allocation.

I’ve been corresponding with a venture capital firm in the U.S. about investing my money in some start-up companies. 😉 I haven’t decided to do anything with this yet, but I think it’s a worthwhile opportunity to explore. Providing seed money for small businesses can have big payoffs with the right management team and execution, but it is also much riskier than investing in the S&P 500.

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Random Useless Fact:

16-04-driving-side-countries-right-left

Mar 212016
 

Retirement Account – Taxation

Many folks should use tax deferred programs such as the RRSP or 401(k). Contributions made into a retirement account is tax-deductible and can grow tax-free in the account. When it is eventually withdrawn and taxed the plan holder will likely be in a lower income tax bracket. I would personally try to keep investments that produce mostly capital gains or eligible Canadian dividends out of my RRSP. But that’s just my personal preference for tax efficiency. The picture in this link here definitely says otherwise.

Most people expect to be in a lower tax bracket when they retire so contributing money into an RRSP to defer taxation to a later date when their tax rate is lower makes sense. But some experts say it’s probably not a good idea to use RRSPs if we expect to retire in either the same or a higher tax bracket as we are in now. However, there might be another way to look at it. 😀

15-08-retirement-plan

What if it’s still smarter to contribute to an RRSP today even if our marginal tax rate will be higher in retirement? When we make a tax deductible contribution to our RRSP today, the immediate tax relief we get is based on our marginal tax rate. So if our marginal tax rate is 30%, then we would receive $300 by contributing $1,000 to a registered retirement account. But when we withdraw money from this RRSP (or RRIF,) the money we take out is only taxed at our average tax rate, not the marginal tax rate. For example, if we request 12 monthly withdrawals a year from our retirement account then these payments would be taxed similarly to receiving work income from a job where each payment reflects our average income tax rate.

This is due to our progressive income tax system. In Ontario for example, the first $45K of income is taxed at roughly 21%, then the next $28K of income is taxed at 30%, and so on. So if we make $100,000, then we actually pay about $26,000 of income tax, which makes our average tax rate 26%, even though our marginal tax rate would be 38%.

So I’m going to continue maxing out my RRSP contributions each year even if there’s a chance my income will be higher in my 60s and 70s than it is now. 🙂

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Random Useless Fact:

Some people on the internet can’t figure out how many girls are in this picture.

16-03-how-many-girls-mirror

 

Sep 272015
 

3 Year History

Usually when investors talk about expected market returns we like to look at historical averages. Over the past 115 years stock markets in the developed world delivered an annualized return of roughly 8.5%. This means we can probably assume that a normal range would be somewhere between 6% and 11%.

I use TD as my discount brokerage at the moment. It has a useful tool to help me gauge my portfolio performance over the years. Most of my stocks are held in registered accounts such as TFSAs or RRSPs, which have preferential tax benefits. 🙂 Here is a quick overview of how my securities in those accounts have performed over the last 3 years. The green line represents my portfolio performance.

15-09-stock-performance-2012-2015

As we can see my overall stocks have achieved a 7.33% annualized rate of return since Sept 2012. This is not that surprising and falls within the 6% to 11% range of a normal market return. 🙂 Also since I can’t use margin to borrow and invest inside these registered accounts, none of my stocks in this chart uses any leverage.

The blue line represents the Canadian stock market index, which has only returned 8.65% over the last 3 years, or 2.8% annualized. This means I technically beat the market here in Canada by more than 4% a year, which is just peachy keen! 😀 But that’s probably because I hold some U.S. stocks in my RRSP and TFSA.

The purple line represents the S&P 500 index in the U.S. The graph shows it has climbed 80.22% since 2012. But keep in mind that this factors in the currency exchange. Otherwise, the return in $USD is closer to 47%, which is still pretty dope. The U.S. currency has become very strong over the past couple of years. Any Canadian who held U.S. stock would have seen double-digit returns even if the price of their stocks didn’t change domestically in U.S. dollars. 😀

Here are a few things I learned from this performance chart. I’ll be keeping these things in mind going forward.

  • It’s possible to pick and choose individual stocks without underperforming the market index, as long as you have the discipline to buy and hold most of the time.
  • Canadian stocks rely too much on commodity prices. Whenever oil and metal prices fall the market really struggles. 🙁
  • Buy some foreign currencies to hold investments that are denominated in those currencies.
  • Diversify globally. Holding a Canadian equity index fund, like the Vanguard Canada All Cap Index ETF, (symbol VCN,) would have barely even beat inflation over the past 3 years, and even the past 5 years.

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