Author: Mr. Cheap

Categories
Investing

$2000 in Dividend Income

A while ago I hit a bit of a milestone with my stock portfolio, and collected my 2000th dividend dollar, which has made me somewhat retrospective. I’ve gotten more used to having the dividends roll in, but I still feel a happy rush whenever they show up in my E*Trade account. Because I’m leveraging my account (buying on margin), most of the dividend payments have gone to pay the interest on what I’ve borrowed, so I certainly haven’t made $2000.

My (horribly non-diversified) portfolio consists of BMO, ROC, NA, RUS, and BAC. I bought WM without really understanding the company. I thought they were a conservative, long-term dividend payer, but instead they’re a growth bank (which is why they got hit so hard by the sub-prime fallout – they were in a VERY aggressive growth mode). There was a temporary rally with WM, which let me sell for a little more than a bought it for, which is when I moved into BAC.

Similarly, I didn’t really understand that RUS was cyclical (and hence the dividend isn’t as safe as I expected when I bought it). They haven’t cut their dividend, but they certainly could if we enter a prolonged recession. I’ve been planning to sell it when it goes above what I paid for it (I know, I know this is a fallacy – I should either keep it or sell it and ignore the current price vs what I paid).

So I’ve massively misunderstood 33% of the stocks I’ve bought so far – not too shabby, eh? 🙂

Other then those two, I’ve been happy with the stocks I own, even though they’ve lost about $4k of their value. My plan was alway to hold them long term, and collect the dividends (ala Derek Foster & Tom Connolly). The only two events that would make me consider selling are 1) they cut their dividend (like WM) or 2) the price goes so high without a corresponding increase in the dividend that the yield drops dramatically (at which point I *might* consider selling it and using the proceeds to buy another stock with a much higher dividend yield). Currently the securities are worth $58,632.04, I owe $33,922.79 (for a net value of $24,709.25). This puts my portfolio at 58% on margin. Margin calls occur at 70% (which I’ve had 2 small ones). With hindsight being 20/20, I clearly bought too early during the sub-prime meltdown.

Originally my plan was to maintain a large debt in the account, and to use the preferred taxation of dividends, along with the deductibility of investment debt, for tax planning. If you go to the Morningstar marginal tax rate calculator and put in an income of $80k, you see that the marginal taxation of public dividends is 20.24%. Since the marginal tax rate is 43.41%, if you bought a dividend paying stock on margin, and the interest rate was equal to the dividend yield (as it was recently for BMO), it will act as a 23.17% “tax sink” (after the dividend pays the interest, you get a 23.17% tax credit). This is only for Canadian dividends, this wouldn’t apply to BAC or WM dividends.

Now that I’m back at school, and not earning anywhere close to $80k (plus, given that grad students don’t have to pay taxes on most of their funding), this doesn’t make as much sense anymore. I’ve shifted gears and am now working on paying down the margin debt rather than expanding the portfolio (as I was planning to do when I was working – I was going to target keeping the portfolio at about 50% on margin). I’m somewhat sad as I think I’ve missed an incredible buying opportunity in the recent months.

Categories
Investing

Labour versus Investment Income

If someone had the choice between a $1,000 / month or a 1% monthly increase on their investments, which is the better choice?

The correct answer, of course, is “it depends”. If someone had $100,000 than 1% monthly would be $1,000. So if you have more than $100k, the increase is better, and if you have less than this the fixed amount would be better.

Mike touched on this in a previous post (Do you really “earn” your investment income?), but I think it bears repeating.

Some PF bloggers spend tons of time analyzing stocks and devising sophisticated strategies that incorporate geopolitical issues and long term forecasts of economics trends. Then you read that their portfolio is worth $24,000. Any benefit from their work is going to be minimal, simply because they have so little to work with. If they were to go out and earn minimum wage from their time, they’d be far further ahead than trying to “juice” the returns on a small investment.

At a certain point it DOES become more lucrative to try to enhance your returns instead of earn a salary. Warren Buffet earns $100,000 / year running Berkshire Hathaway. This is a tiny, tiny fraction of his 62 billion dollar worth. Clearly he isn’t going to work for this salary. He’s goes into work because he enjoys it and to increase the return of the money he has invested in his company. If he can enhance B.H. returns by 1% a year, he increases his net worth by 620 million (many, many times his salary).

For people trying to manage their finances, I think that when their net worth is low, they are better served to try to increase their income and not worry about their investment returns. Go with something simple like a high yield savings account, a money market fund, or a broad market index fund. Any effort you want to put into your finances will be best served earning or saving more dollars, rather than trying to maximize your return. If you have a negative net worth, paying down your debt is almost certainly the best place for your money, and I’d say it would be a no-brainer that you should just keep earning as much as you can, spend as little as you can, and apply the difference to your debt. If this won’t dig you out of your hole anytime soon, perhaps it’s time to look into bankruptcy.

The more your net worth grows, the more you should shift gears to try to find better returns. This could mean investment real estate, more sophisticated stock selection, asset allocation, or any of the other popular personal finance topics.

Categories
Announcements

Happy First Birthday Quest for Four Pillars

One year ago I made my first blog post on my old blog (http://cheapcanuck.wordpress.com) and a few days later on May 16th Mike made his first post on Four Pillars. Since then, we’ve merged our blogs, written a number of book reviews, and posted extensively about retirement planning, real estate investing, asset allocation and dividend investing.

We’ve generated controversy, made some friends in the personal finance blogosphere, and even got a chance to meet Bill Gates! Life always changes, often for the better.

We’re proud of the series that we’ve published, including Mike’s popular Baby Expenses, RESP (which I keep trying to get him to turn into an eBook), and leveraged investing. I’ve posted an overview of buying my investment condo, and the factors that make up the return from a rental property.

Comments and RSS numbers are the coin bloggers get paid in, so we’ve been delighted at the wonderful group of people who have been joining us on a daily basis and responding to our musings on financial topics. They say teachers learn from their students, and it’s certainly been true for me that bloggers learn from their commenters.

While we’re in a reflective mood, we’d love to welcome any ideas for what types of posts you’d like to see more of in the future, or any new types that you’d like us to add to the mix. Please comment on this post or e-mail us.

Categories
Frugal

Everyman’s Guide to Decreasing Expenses

Much like my recent post on finding extra income if you’re poor and unskilled, this post is about methods for reducing your expenses, which SHOULD be possible for most people. If you’re not doing any of the things listed, and *still* have trouble getting by on your salary (which is at least equivalent to full-time, minimum wage work), please send me an e-mail at [email protected] and I’ll try to help you work something out…One of the best parts of cutting expenses instead of increasing income, is you pay for almost all expenses with after tax dollars. A dollar saved is worth more than a dollar earned (since the government will do its best to take as much as possible of that earned dollar away from you).

I’m not saying everyone should do each of these things (I don’t). These are just ideas for ways that most people could spend less money (if that’s your bag, baby).

  1. Stop using recreational drugs. This includes legal and illegal. Tobacco, alcohol, pot, etc. Stop doing all of them. Even if you’re smoking Rothman’s (sniff). Ben Stein has some interesting thoughts on this.
  2. Stop eating out. I was able to save hundreds of dollars when I started preparing food at home instead of eating out all the time. If you miss the social element of dining with friends, start having each other over to your houses and cook for each other. Similarly to eating at home, you can save money by making your own meals instead of buying pre-prepared meals.
  3. Cancel your cable. You don’t need TV. Really! You can even become like this guy.
  4. Cancel your internet. It pains me to add this one, as I’d go and collect empty bottles for $20 / month before I’d cancel my internet. HOWEVER, you CAN surf at your local library and most people could get by with 30 or 45 minutes there each day.
  5. Move into a smaller living space. If you’re in a house, move into an apartment. If you’re in an apartment, move into a smaller apartment (or get a roommate). At the most extreme, rent a room in someone else’s house or a rooming house. At the ultra, ultra extreme consider living in a vehicle (maybe talk to family / friends before you get this desperate though).
  6. Get rid of your car(s). If you need your car to get to work or school, move somewhere closer that you can walk / transit from. If you have more than one car, consider selling the extras and getting by with just one. I’ve never owned a car. Maybe you can’t get rid of it if you’re living in it though ;-).
  7. Quit your job. A common idea in many blog posts is whether you’re further ahead or not having a second parent work. Crunch the numbers and see if you might be further ahead staying at home instead of working.
  8. Cancel any / all memberships. Get rid of gym memberships, Netflix, etc. Re-occurring expenses are killer.

Debt reduction blogs will have FAR more ideas than presented here, but these are some areas I’d look at trimming if I was spending more money than I was earning each month (or if I wanted to stop working with less savings). The basic theme is these are all wants, rather than needs. Learn the difference, get rid of the wants that aren’t worth the money you’re paying for them, and LATER in life, when you have more cash, re-introduce them to your lifestyle.

What are the first areas you’d look at cutting out of your lifestyle if you wanted to trim your monthly expenses?

Categories
Personal Finance

Everyman’s Guide to Increasing Income

Mike and I often post about how to manage your finances to get a little bit of extra return from it (whether it be through leveraged investing, real estate, dividends or asset allocation). That’s the stage of “financial life” we’re at. Some people comment on personal finance blogs and say “that’s all well and good for you, but what about those of us who don’t have any money to invest?”.

With that in mind, I thought it might be useful to do a post about how to make extra money if you’re poor and unskilled. I’ll apologize in advance, but most of these boil down to “get a second job”. When you don’t have any money to invest, unfortunately your labour is what you have to earn money with. I’ve done most of these myself (and am happy I don’t have to do them any more).

I’m not going to post any “get rich quick” ideas like setting up a vending machine route or doing “no money down” real estate deals. These are all ultra-low-risk, very reliable ideas to get some extra cash in your pocket. As well, some things people suggest like blogging for ad revenue clearly have a spectrum of returns they offer. Probably most blogs pay the people who start them FAR less than minimum wage. These all should be fairly close to “sure things” (which is why they don’t pay all that great).

  1. Get a second job. Yes, I’m sure that you work hard and I can understand at the end of the day the last thing you want to do is head off and work somewhere else. Jobs like delivering newspapers, product samples, phone books, working retail, working fast food, or telemarketing are usually available (I’ve done each of these except for telemarketing). Like everyone, you have to decide which you want more: money or free time.
  2. Work overtime at your current job. If you’re not on salary, see if there’s the opportunity to work longer shifts or extra shifts. Many companies have trouble getting staff these days, so your manager might be very happy to give you extra work. If you get any sort of over-time pay all the better!
  3. Start a cleaning business. Most people like to live in a clean house but hate to clean. You can earn $10-15 / hour pretty easily by just putting up some fliers around your neighborhood with your phone number and rates. Eventually you can bring your own cleaning supplies and charge more (probably $20 / hour). Any healthy adult can wipe dusty surfaces, scour tubs and vacuum. Clean freak customers will be delighted to give you pointers to make you a better cleaner.
  4. Do semi-skilled work. Can you surf the Internet, write e-mails and use Word? Post a flier offering to teach elderly people basic computer skills. Have you passed many high school subjects? Offer in-home tutoring on any subjects you did well in. Can you do minor repairs, cut grass or paint? Post a flier offering to be a “rent-a-husband”. Do you have a car? Get a job that requires one (like delivering pizzas) or offer things like getting groceries for shut-ins.
  5. Help people clean out basements / garages. Post a flier saying you’ll help people clean out their garage or basement if they let you take anything that they’re going to throw away. It amazes me what perfectly good things people will toss. Take their garbage and sell it on EBay or Craigslist. A digital camera may eventually be useful (maybe one of your clean up jobs will give you an old one). A truck would be useful as well (then you could take furniture / appliances as well). Eventually you’ll learn what will sell and what really is garbage.
  6. House sit / Baby sit / Pet sit. Check in on people’s houses while they’re on vacation or walk their dog while they’re at work. Requires you to be trustworthy and responsible (they’re trusting you to take care of their beloved homes, children and animals), but once you’ve proven yourself there’s a good chance of repeat business and referrals. An added benefit is that you can walk multiple dogs at once, or check on many houses on the same day – you get paid multiple times for the same time commitment!
  7. Do some small scale farming. If you live in a rural area, grow plants you can sell or raise small animals (such as rabbits or chickens). Get a book from the library or find someone already doing something along these lines and learn from them. You can even offer the plants / meat as “organic” (since you’re not going to use pesticides or anything, right?). Rabbits can thrive on day-old bread (bakeries will sell you a ton of it cheap) and weeds and greens you can pull from anywhere. Chicken feed is dirt cheap. A fun article about raising chickens was posted on kuro5hin. Don’t bother trying to breed dogs or anything like that – the market is saturated with people doing it for fun and you won’t be able to make any money. If you end up not being able to sell what you’ve raised – eat it yourself and cut your grocery bill!

Pretty much any of these can be expanded to something that pays significantly more if you like it and are good at it. Do you like doing minor repairs or painting? Start a flooring or painting side-business. Got more cleaning customers than you can handle? Raise your prices and hire someone to help part-time. An aunt of a friend of mine house-sits full time. When people go on extended vacations, she moves in and lives in their place – no need to pay rent! As you get more skilled or expand your operations, the pay will increase as well. When I was doing contract programming, I was basically doing the computer skills idea at a much higher level (and was able to charge $50 / hour to do so).

More information

104 ways to save extra money – Great list of ideas to save money.

Categories
Real Estate

Real Estate Video Games

NOTE: All software linked to in this post is NON-AFFILIATE. We don’t make any money off of any of these, I’m just linking to them because I think they’re interesting. The Reflexive games allow one hour of free play before purchase.

A few months ago I posted some ideas for a real estate video game I’d like to play. I’ve since come across a couple of games that are much better at presenting more realistic real estate concepts than Mansion Impossible is.

Build-a-lot is a game where you play a developer. You buy materials, hire workers and buy and sell land and buildings. The properties never increase in value (unless you build improvements on them), so the only ways to make money are to build properties and sell them, or collect rent from the properties you own.

I liked the concepts it presented of buying underused lots, building a higher value building on it, then selling it at a profit. Selling prices decrease if other properties are for sale (that’s the only element that affects the resale market and home prices).

I didn’t like how static everything was. Because you know the EXACT value and cost of every building and improvement in the game, it becomes quite easy to maximize your profit. It would have been interesting if they had included random elements affecting the property values and some concept of leverage (there’s no way to borrow money in the game).

If you like it and want to play for another hour, you can also try Build-a-lot 2.

A more sophisticated game, Real Estate Empire lets you pick a role, ranging for a carpenter (who can repair things more cheaply) to an MBA (who has a high salary and can put together better deals). You’re based in a town and play over 4 years, each turn taking a month, trying to buy and sell real estate for a profit, and selectively improve properties (looking for the best “bang for your buck” for improvements).

I really like the idea of different roles and how you can pursue different strategies (buying trashed houses and repairing them or buying undervalued properties then reselling them). You play against 4 computer opponents (in Build-a-lot there’s no competition). As well, you have a credit rating (which is bad when you start), which affects the financing terms on the various properties (as your credit improves, you can put less money down and pay less interest). The real estate market “fluctuates” in the game, so you can easily overpay for properties if you always offer sellers their asking price. You can also “over spend” on improvements where you fix up a property to the point that you can’t recoup what you put into it. You have to be careful about balancing the cost of renovations with the value they add. The game even offers you multiple options on how to sell your property, from a real estate agent (quick sale for 5% of the price), FSBO (balanced) or a newspaper ad (cheap and ineffective).

The one thing I found was a real weakness in the game is that each property had a “Estimated Value” which is what you can ALMOST ALWAYS sell the property for with a real estate agent. This makes a very straightforward (and effective) strategy simply to only buy properties with an asking price LOWER than their estimated value (still offering them a bit less than their asking price), then immediately resell it with a real estate agent (and the property will immediately resell for the estimated value – for some reason the new buyer didn’t want it the month before when it was a much lower price). If they removed the estimated value number (or made it vary wildly until you developed a better understanding of the market) I think it would improve the game.

Categories
Personal Finance

Re-Earned Income

A while ago I read a post about only spending re-earned money. Its not a new concept, and in fact in George Samuel Clason’s classic “The Richest Man in Babylon” he talks about something similar. In it, a money lender is teaching an ambitious young boy how to become rich. He has convinced him to live below his means and invest the excess. The money lender asks him what he does with the income from the money he saves. The boy talks about the delicious foods and the fancy clothes he purchases. To which the money lender chastise him and says that he’s “eating his children” and he has to allow his wealth to compound and keep making more for him (the re-re-earnings in the originally linked to post).

Another blog post I read was about the blogger getting his first $30 / month in passive income. He was excited, but also had the feeling “its just $30 / month”. Similarly I was talking to some friends one time about my investment condo and talked about how I make around $250 / month from it and one of them apologetically said “$250 per month isn’t very much money”.

Its true, but one of the commenters on the $30 / month post said to think about it like some bill he’d never have to pay for again. Imagine he got a cell phone with free usage for the rest of his life. You’d be pretty excited about that, right? If I view my condo as paying for all my groceries for the rest of my life, $250 / month becomes pretty sweet!

Most of my long term financial plans revolve around re-earned income (as the original poster called it). Being able to have passive, reliable income that covers the various expenses in life seems to me to be the best way to get to the point where you can be confident that you’ll never be forced to work somewhere you hate for the rest of your life.

Categories
Announcements

PhD Announcement

As I’ve wrote about before, I’ve applied to do a PhD. I was very fortunate that I was accepted at the two schools I was most interested in. After a tough decision, I’ll be officially starting at the University of Waterloo in the fall (and moved there last weekend to do some research assistant’s work through the summer).

One of the big pluses will be that I’ll be fairly close to Toronto, so I can come back whenever I hear Mike has some beer that needs drinking. My condo has been pretty hands off, but it will also be nice to be within striking distance if I need to do anything there.

My supervisor has a tendency to push students through quickly, so I may be Dr. Cheap as early as 2012 (which, really, is just around the corner).

Many, many thanks to Wooly Woman and Larry MacDonald who let me pick their brains via e-mail (Wooly Woman was good enough to even read over my application!), to everyone who has commented on my related posts and the people I’ve talked to “in real life”.