Category Archives: Personal Finance

My Favorite Income Generating Assets

By: GenXinvestor

income generating assets : image with the word assets in the centreWelcome to this post on my favorite income generating assets.  Every time I read financial news, there’s always some new report that says there’s a real crisis in our society when it comes to debt and how most people manage their cash-flow.  

The Payroll Association released a report in September that said that over 50% of the population are wage slaves that can’t afford a delay in their pay, let alone missing out on 1 paycheck altogether.

Instead of drowning in bills and debt, we need to be investing in a collection of assets that pay us a monthly or quarterly income.  Our economy and society are changing so people must learn to change with it.  It’s my view that diversifying our sources of income will be key to financial success in the 21st century.

Changing How We Think of About our Source(s) of Income

If asked to write down their sources of income, most people would likely only be able to list just one…their job.  This is precisely why “job security” ranks so high (after annual salary) in polls about what people are looking for in an ideal job.  People want job security but what they really need is income security which can only be achieved by establishing and growing various income generating assets.

Be an Owner Not a Worker

At the dawn of the industrial revolution, Karl Marx recognized that a fundamental source of social and economic inequality had to do with the fact that workers weren’t owners.  They didn’t share in the prosperity that was created by one of the greatest economic expansions in history, while the owners got rich.  

For better or worse, we live in a capitalist system that rewards owners with the potential to create vast amounts of wealth; while the rest of society gets a poor, subsistence, or average middle class living.  To break out of that cycle we need to start thinking like owners and start investing our money in assets that will increase in value while paying us a monthly income.  

The key thing to remember is that when people work for money, the most they’ll ever make is whatever their boss is willing to pay them.  There is an upper limit or ceiling to their earnings potential.  Sure they can try to work a second job or start a side hustle, but even those will only get them so far because there is only so many hours a person can actually work.

On the other hand, money never sleeps.  If properly invested it just continues to grow and compound.  When someone owns income generating assets, they will continue to pay them for as long as they own.  Owning enough assets that generate income gives people more choice in life, which is what financial independence is all about.

A person doesn’t have to work at a job that they hate if half of their monthly income comes from their income generating assets.  They can choose to pursue whatever type of work that they truly enjoy rather than working a job they hate to make ends meet.

Owning assets that pay a monthly income is a huge financial buffer against job loss or some unexpected financial calamity.  I view these assets as more important than an “emergency fund” because an emergency fund can be depleted, while income generating assets keep on churning out cash month after month.

My Favorite Income Generating Assets

Online Assets: Website or Blog

It’s easier than ever to start building a website or a blog.  You don’t need a computer science degree to start one and if you’re passionate about something, then start writing about it on a blog or your own personal website!

The great thing about owning an online asset is that they’re cheap to start up and maintain while there’s virtually no limit to their earnings potential in the right hands.  Domain names and web hosting can be purchased for around $100-$200 a year.  I use Bluehost and have had a great experience with them.   

While blogging for enjoyment is rewarding in its own right, there are also ways to earn income from doing something that you love.  I can say from my own experience that earning online income requires a lot of work and patience.  But with the right entrepreneurial spirit, we are all capable of earning some level of income from an online asset like a website or a blog.

Once the website or blog is created, it’s easy to start monetizing it.  Google offers its Adsense program which pays on a pay-per-click basis.  There are also tons of affiliate marketing programs that are relatively easy to join.

Some people have earned a significant amount of money from owning websites.  While it’s possible to earn several thousands of dollars by owning online assets, I’d say the norm is probably a few hundred bucks a month.

In general, I find that the more time and effort that goes into something, the better my results.  So it’s important to write high quality content that people want to read.  Once some articles get high rankings in Google, traffic flows will increase and so will the website’s earnings.

The low startup costs as well as the potential to earn decent money makes owning a website one of my favourite income generating assets. 

Dividend Stocks

Yes I love my dividend stocks.  I’ve been investing in dividend paying stocks for years and it’s a great way to build retirement income or just an alternative form of income in general.

My strategy with dividend stocks is simple.  I buy shares in great businesses that pay a quarterly dividend.  Each quarter I have the option to receive the cash dividend in my bank account or reinvest it to buy more shares which, in turn, will pay me even more money next quarter.  My focus is always on growing my alternative sources of income so I always reinvest my dividend income.

Investing in stocks to “live off the dividends” is a long term strategy, so don’t expect it to produce a large amount of income overnight.  The idea is that, over time, by regularly investing in a portfolio of dividend stocks, the initial slow trickle of dividend income will one day become a solid and dependable stream of income.  This approach certainly takes a long time and a lot of money, but it can be done.

Another great feature of dividend investing is that most companies raise their dividend once or twice a year which provides a nice boost to the quarterly income.  As I’ve said before, it’s been a couple of years since I got my last raise from my job, but my dividend portfolio is constantly rewarding me with periodic dividend raises.

Tax Advantages for Dividend Stocks

There are several tax advantages for owning stocks that pay dividends as well.  For example, if I hold my shares in a tax sheltered account like an RRSP, TFSA, 401k etc., I pay little to no tax on the dividends.  If I hold shares in a taxable account, I’ll have to pay taxes on the dividends but at a much lower rate than money that I make by working.  Think about that for a minute.  If you work for money you’ll pay more tax than if you receive income from your investments!  That’s another big reason why it’s better to be an owner than a worker.

Oh and I haven’t even mentioned the great benefit of capital gains.  When a person owns stocks and they increase in value, they don’t pay any taxes on the gains until they sell.  When the stocks are sold, only 50% of the gains are taxed, the rest is pure, untaxed profit.  The 50% of the gains that are taxed are simply added to the person’s annual income and taxed at the marginal rate.

Here, an example is instructive to show the benefits of capital gains.  Let’s say you invest in a stock – any stock – it doesn’t have to be one that pays dividends.  In 1 year you sell that stock and made a gain of $10,000!  Half of that gain ($5,000) is yours free and clear.  After all, you’ve earned by virtue of being an owner!  The other half is taxed at your marginal rate – let’s say 43%.  That means you’ll pay just $2,150 in taxes.  In effect you’ll see nearly 80% ($7,850) of the money you made on the stock!  That’s a lot more than what you would see if you simply worked to earn that ten grand.

Based on a general understanding of how taxes affect investments, someone could employ a strategy where they hold higher yielding dividend paying stocks in their tax sheltered accounts, and their lower yielding stocks with a higher potential for large capital gains in taxable accounts.  So, for example, I hold my banks and utilities in my tax sheltered accounts, while CNR is held in a taxable account.

Overall, I think dividend stocks offer many benefits and are a great option for people seeking to own income generating assets.  Dividend stocks are a great diversifier of income and have a very low barrier to entry.  It’s possible to start investing in exchange-traded funds that hold a basket of dividend paying stocks for as little as $25 a month through Questrade.  If you choose to own dividend stocks directly, it’s possible to set up a DRIP (dividend re-investment plan) for as little as the price of 1 share (averages around $50).

Rental Property

Owning property and renting it out is one of the oldest ways to build wealth and generate extra monthly income.  The great thing about real estate is that there’s a market for virtually every type of property.

You can rent a cottage, camp or other vacation / recreational property.  Farm land / agricultural land can be rented.  In residential real estate, you can rent out a room in your home, a floor, an apartment, or in-law suite.  You can rent out a condo, townhouse, duplex, detached house etc.  You can even rent out your garage, a parking space or a storage locker etc., etc.

Any type of real estate has the potential to generate income.  At one point, I rented out a room in my home and now I own and rent out multi-family units.

Not only is real estate a strong income generator, but it’s also a great wealth builder.  Investment property is the one asset class that virtually every rich person owns and it’s easy to understand why.

Owning Rental Property Has Several Advantages:

  1. The regular monthly income adds to your cash flow.
  1. Real estate prices and rents tend to track inflation over time.
  1. The tenants literally pay off your mortgage.
  1. There are several tax advantages and deductions available to rental property owners.

Sure, everyone’s heard a horror story involving a rental property.  Some even use that as their excuse for not wanting to deal with the “headaches” involved in owning rental property and being a landlord.  But it’s also true that real estate has made more millionaires than everything else combined!  So in my opinion, it’s definitely worth considering if you have the mindset and the financial means.

That last part about having the financial means is very important when it comes to real estate investing.  Unlike the other two examples of income generating assets, real estate requires a large initial investment.  The current rules require investors to put up 20% of the purchase price of the investment property.  This could be tens of thousands if not hundreds of thousands of dollars, depending on where the purchase is made.  On top of that there’s all the closing costs and expenses involved in acquiring a property.  Plus it’s important to budget for maintenance and vacancies.

That’s why I believe that it’s better for people to invest in dividend stocks or other financial assets first, due to their low barrier of entry, before taking the plunge and purchasing a rental property.  Owning financial assets gives us liquidity, which means that they can easily be sold and converted into cash.  Trust me, if you’re going to own rental property you’ll want to have a cash cushion.

That’s it for this post. Thanks for reading about my favorite income generating assets.

Photo Credit: Image courtesy of Stuart Miles / Freedigitalphotos.net

Debt, Cash-Flow and the Good Life

By: GenXinvestor

Here is my post on debt, cash-flow and the good life!

It’s no secret that record low interest rates have sparked one of the largest debt binges in history.  Year after year, studies show that people are getting more and more in debt and that this trend won’t change anytime soon.

Last week a report by the Canadian Payroll Association mentioned that half of all Canadians live paycheck to paycheck and those people would face hard times if their pay were delayed by just one week!  Nearly 25% said they would be hard pressed to cough up 2k in an emergency, while 40% say they spend all or more than their net pay!

This week, the credit agency Transunion reported that if interest rates rise by 1% almost 1 million people would be hard up to make ends meet and service their debt.  Raise rates by even a mere 0.25% and 718k people would face a personal financial crisis.

debt, cash-flow: man crouching next to letters that spell debt

What’s the big problem here?  Most people will see the obvious and say that it’s that dirty little four-letter word, D-E-B-T, and the fact that people simply have too much of it.  But another, equally important, problem is that most people lack any kind of cash flow beyond their bi-weekly paycheck.

After all, having debt isn’t really an issue if you have the cash flow to cover it along with the other monthly expenses.  The real problem as I see it is that record low interest rates over the past 8 years have sent our society on a huge spending binge where people have spent big on things like houses, vehicles and a bunch of other “stuff” that doesn’t put money into their pockets.  That’s what “bad” debt is.  Those items don’t produce any extra monthly cash flow; instead they’re added expenses that drain away monthly cash flow.

My advice to people is to not follow the herd and keep piling on additional “bad” debt because, sooner or later, rising interest rates will come back to bite you.  Rather, consider paying down some of that debt so you won’t be over exposed when interest rates rise.  If you’re in a cash crunch, you have 2 choices: cut expenses or make more money.  Once you’re in a decent financial position consider using debt to increase your monthly cash flow by investing in income generating assets.

Remember that good debt is used to buy assets that pay you every month.  Things like dividend stocks, real-estate investment trusts (REITs) and rental properties.  Increasing the monthly cash flow is what financial freedom is really about so that’s why I focus on buying assets that pay me every month.

I haven’t had a pay raise from my job in years but my dividend stocks give me raises at least once a year and my rentals should at least keep pace with inflation.

Like most people, I used to think that the key to the good life was simply getting a good paying job.  Get a good job, buy a house and for the rest of your working life pay down debt and build up savings to retire.  That’s what we’re taught and that’s the path that most people follow and that’s precisely why most people can’t stomach a measly 0.25% rate increase and why they can’t pay the bills on time if their pay was delayed.

Now more than ever, I think the key is to own assets that pay a regular income.  Not only do they add to the monthly cash flow, but they also provide some level of financial security in the event that I lose my job or I have unexpected monthly expenses etc.  As I wrote in an earlier post, my approach has been to grow my assets and my income over time.

The funny thing is, is that no one ever told me to buy dividend stocks or rental units or anything else that adds extra money to the monthly budget and positively affects my financial well-being.  Instead, society teaches us to buy expensive houses and cars and big screen TVs – all things that eat up a large portion of the monthly cash flow and, in the case of vehicles and gadgets, negatively impact someone’s financial well-being.

For all those suffering under the burden of debt and the daily grind, it’s important to remember that it’s never too late to start building wealth and you can do it for as little as $25 a month!

If you’re a little bit weary of the stock market then you should take a bit of time to do some research about investing.  In the meantime, consider a High Interest Savings Account from Tangerine: More Is Always Better Become A Client And Earn Triple Interest Of 2.40% For Six Months!

Thanks for reading my post on debt, cash-flow and the good life.  If you’ve enjoyed reading this, check out my other posts on building wealth and growing passive income sources:

5 Steps to Growing Your Wealth

Why I Keep Growing My Passive Income

Photo Credit: Photo by renjith krishnan/Freedigitalphotos.net