Category Archives: Control Expenses

How Long Will It Take to Get to $30,000 of Dividend Income?

Summary

  • How much do North Americans save every year? How much do you save and invest every year?
  • How many years will it take for you to get to $30,000 of dividend income?
  • The size of your current portfolio is, how much you contribute monthly, how much dividends you reinvest, and how much your income tax rate is will affect how long it takes.

How Much Does North Americans Save?

The latest data we found (from Jan. 2018) indicates the average Canadian earns CAD$55,806 in annual income, but the household savings rate was measly 1.1% in Q1 2019. That equates to tiny monthly savings of CAD$51.

Q4 2018 data indicates that the median annual income for an American was ~US$46,800, while the U.S. savings rate was recently 6-8% (US$234-312 per month), which is much better than in Canada.

Saving is a habit. The more you save now and invest it properly, the less you have to save for the future. 

It’s not uncommon to save from 10% to 50% of one’s income. If the average Canadian or American can save just 15% of their income, that’d imply an amount of CAD$8,370 or US$7,020 that can be invested every year (or about CAD$700 or US$600 a month, respectively).

a creative photo of finance with a focus on funding, saving, and benefit
Image by rawpixel from Pixabay

Since you have money to invest in stocks, obviously, you’re in much better financial shape than the average North American. 

In the scenarios below, we assume you need $30,000 of dividend income (complemented by other income such as job’s income, rental income, or pension income) to live comfortably. Regardless of how much dividend income you need, the principles discussed will still be relevant.

Our other assumptions include a safe and conservative portfolio yield of 3% and a very achievable 10% rate of return on investments.

Scenario 1a: Starting with a $120,000 Portfolio

Assumptions:

  • You currently have a portfolio value of $120,000
  • Annual growth of the portfolio is 10%, compounded annually
  • Monthly contribution: $0
  • Portfolio yields: 3%
  • Tax rate on dividends: 5.5%

Source: Author

Based on the assumptions above, it’ll take 23 years to earn $30,000 of annual dividend income. Notably, if we reinvested all the dividends received (after taxes), we would cut down 7 years and only take 16 years to earn $30,000 of dividend income. 

Everyone’s tax rate is different. In our case, the Canadian province we reside in implies the highest tax bracket of 5.5% in 2019 if our only income were eligible Canadian dividends.

Obviously, if the tax rate were much higher, the dividends (after taxes) we get to invest will be so much lower, and it’ll take longer to achieve our dividend income goal. We just used the 5.5% as a conservative estimate, as the effective tax rate should be lower because the taxes for lower brackets are lower. 

Annual Dividend based on 10% portfolio growth rate that assumes corresponding dividend growth:

Source: Author

Portfolio value with no dividend reinvested vs. Portfolio value with dividends reinvested

Source: Author

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How Much Are You Really Paying for Your Property?

Most people need to get a mortgage (i.e., a loan) to buy a property. After all, investing in real estate is a humongous investment.

In the scenario of buying your first home, the good thing is that once your mortgage gets approved and all the papers are signed, you can start living in the home while paying off the mortgage every month.

Have you thought about how much you’re really paying for your property?

There are a number of factors that affect how much, in total, you’re paying for your property. Here, we’ll focus on the total you’re paying your lender over the course of paying back the mortgage in its entirety (also called the mortgage amortization period).

a beautiful blue house for a home

What affects how much you’re paying in total for your property?

On top of the price you paid for your property, you need to pay back the mortgage with interests. Here are factors that affect ultimately how much you’re really paying for your property. We’ll follow with an example later.

  1. Interest rate: the higher the interest rate, the more interests you’ll be paying your lender.
  2. The amortization period: the longer the amortization period, the more interests you’ll pay.
  3. If you need to get mortgage insurance, that will add to the cost as well.

Notably, the interest rate you pay for your mortgage changes. For example, it may take 25 years for you to pay off your mortgage, but mortgages tend to be shorter. The most common is a 5-year mortgage. You can also choose between fixed rate or variable rate.

Typically, variable rate results in lower effective interests. However, some people like the predictability of fixed rate. At the end of the 5-year period, you’ll refinance your mortgage at a new interest rate.

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5 Ways to Reduce Debt

It’s not difficult to reduce your debt. It’s a matter of getting into a habit to always spend less than you make. So that eventually, not only are you reducing your debt, but you’ll also be saving for your future.

Where do you spend your money?

Before you can reduce your debt, you need to know where you’re spending your money. Keep track of your spending and categorize them into Food, Recurring Bills, Entertainment, and so on. Most importantly, add in a column for “needs or wants”.

You can reduce or even eliminate items marked as wants if you’re pressed on reducing your debt.

Forbes conveniently created a list of apps to help you track your spending.

Here are more tips on how to reduce your monthly spending.

Set financial goals

pink piggy bank

Photo Credit: kenteegardin from SeniorLiving.org via Compfight cc

Where do you want to be 30 years from now? Let’s say your goal is to reach $1,000,000 in 30 years. The earlier you start saving and investing, the easier it is to reach that goal. However, debt will slow down your progress because you have to pay interest.

So, the faster you repay your debt, the sooner you get to save and invest. It only makes sense to let your debt accumulate if you can guarantee higher returns from your investments.

For example, if you can earn 10% on your investments, you can repay your debt that costs you a 5% interest at a lower pace. In this case, you’d be using leverage to grow your assets.

However, whether to use debt to invest really depends on whether you sleep well with the debt that you have and how sure you are of generating high enough returns from your investments. Read More