Tuesday, November 4, 2014

#39 Adopt an Entrepreneur/Investor mindset

Having worked in the oil patch for a decade, I know quite a few wealthy people.  My father asked me the other day how most of my wealthy friends made most of their money.  My response was that the overwhelming majority of the wealthy people that I know, became wealthy by either starting a business or by taking a financial interest in a company by buying or owning company shares.  I struggled to name anyone I know who is wealthy who got that way from being an employee.  I believe this is a important learning and it reminds me of a few books I read by Robert Kiyosaki.

I first tried reading Rich Dad, Poor Dad by Robert Kiyosaki in 2002.  Tim, a co-worker of mine, had leant the book to me after reading it himself.  He was excited about what he had learned and suggested I should read it to learn how to become wealthy.  I got about halfway through the book and thought "Where is this recipe to building wealth that Tim talked about?".  The book doesn't specifically lay out what kind of investments to go into, it just went on talking about owning real estate and building businesses.  "Hell, I don't need this, I have a good job making good money... I don't have the time to do shit like buy rental properties.  This books sucks!"  I didn't finish the book.

The next time someone recommended I get into Kiyosaki's stuff was in 2007. By then Kim and I were well into into aggressively saving and investing our money so I was looking to maximize our investment dollars.  Another co-worker, another Tim oddly enough, was listening to self-help books and podcasts on his MP3 player and he recommended I try out Kiyosaki's book "Rich Dad's Cashflow Quadrant".  I listened to it. Then listened to it again.  This time I 'got' what Kiyosaki was saying.  The Rich Dad series is really about mindset and how you look at, and earn, money.  There is no recipe.  You create the recipe.  The focus of the book is in how somebody earns money, with emphasis on financial risk and reward.  In Cashflow Quadrant, there are 4 main earner mindsets.  They are summed up as:

Employee - You earn an income by working for someone else. You have no financial interest or risk in the success of the business.  If you stop working the money stops coming in.

Self Employed - You earn an income by working for yourself.  You take on the financial risk of your business but you also do ALL the work.  If you stop working, the money stops coming in.

Entrepreneur (Business Owner) - You earn an income by building and (possibly) operating a business.  You take on the financial risk of the business but you do some work and pay other people to do work to make the business a success.  At some point, your business may run on its own.

Investor - You earn income by investing your money in other people's business or in publicly traded businesses, such as those listed on the stock market.  You take on the financial risk of the business, but have no active role in running it.

Cashflow Quadrant from Kiyosaki.

Many people fit in to multiple earner mindsets or quadrants as Kiyosaki calls them.  The biggest learning I got out of Kiyosaki's Cashflow Quadrant book was that in order to become Financially Independent, you need to move towards the Entrepreneur/Investor side of the spectrum.  Being an employee or being self employed earns you a paycheque but often gives you nothing more once you stop working.  It is when you get your money working FOR YOU in the form of a business or investments that you are able to step back from working.  By moving to the E/I side of earning income, you begin to detach yourself from being dependent on other people to look after you, whether that be an employer or the government.

We were naturally moving towards that mindset on our own in the early 00's but after reading Kiyosaki's Cashflow Quadrant book, we ratcheted it up and were ready during the 08-09 financial meltdown to take advantage of investment opportunities and use leverage to buy quality stocks in the same way real estate investors/landlords buy rental properties.  We went directly to the Investor quadrant early while still in the Employee Quadrant, investing in dividend income and growth stocks.  By using our employee income to build our Investor income, we have gradually moved from one side of the quadrant plot to the other.  At present, about half our income comes from the Employee quadrant, and half come from the Investor quadrant.  At some point our investor income will be all we need to meet our monthly liabilities.  At that point we will be financially free.

By taking on an Entrepreneur/Investor mindset I believe a person takes on more risk, but acquires more freedom.  They are more in control of their life and less dependent on others.  It takes more discipline and motivation to take that path, but I believe it has been very worthwhile for us. While I do not suggest everyone go out and start a business, stocks are available to everyone once you have some savings to put to use.

Thursday, October 30, 2014

Dividend income growth... 16 months in review.

If you follow any of my previous posts, you know I am a believer in dividend growth investing.  We've consistently been able to achieve an increase of our portfolio's annual dividend income since we started using this strategy with the lowest annual portfolio dividend income increase of approximately 5%.  We grow our dividend income through dividend reinvestment, new monies added to the pot, and from dividend increases.  This year and a half has been a bit of a special case from past years because we have added NO NEW MONIES to our investment pot.  Therefor the increases over the past 16 months are solely from the pooling of dividends and then reinvesting them, and from dividend increases which have been plentiful this year.   I've also incorporated some covered call writing in our RRSPs to add a little extra cash-flow but those are really small potatoes compared to effect of the reinvestment and increases of the existing dividends.  From July1 2013 to October 30 of 2014 we have increased our dividend income by a compounded rate of 17.5% over those 16 months.. or just over 1% per month.  Our portfolio currently yields about 4.5%, so over the 16 months about 6% of the growth came from reinvestment and the remaining 11.5% is from dividend increases.  This represents an annual dividend growth rate of about 8.6%. Not too shabby.

The following chart shows the increase to our annual dividend income for each month, which includes both reinvestment and dividend increases.

Note that every month there was an increase in our total dividend income.  Every month had some form of increase and there were no decreases.  In order to give this chart a bit more meaning, lets assume that July 1st 2013, we made $10000 a year in dividend income.  The monthly increases to that amount would look like this:

... to the point where $10000 in dividend income turns into $11749, 16 months later.

If you've been watching the stock market over any period of time, you know that we always see increases and decreases in stock prices, usually by the second during market hours sometimes with big swings to the upside and the downside.  This watching of the market go up an down can rattle some people as they watch their portfolio value increase or decrease by up to double digit swings within short periods of time.  The above chart is the kind of chart I like.  Our dividend income continues to rise month after month.  Some months we had dividend increases and other months we deployed some of the dividend monies that had built up and bought some more stock.. usually ones that we thought were depressed. on sale, or were due for a sustainable dividend hike in the future.

Tuesday, October 28, 2014

#38 Use good debt wisely, get rid of bad debt completely.

Most people have some form of debt.  Credit card debt, student debt, mortgage debt, car loan, family loans, investment loans, payday loans, rotating lines of credit, and consolidation loans are probably the most common types of debt.  People typically use debt to buy something when they don't have the money for it at that given moment in time.  We as a society don't often save up for things before we buy them, but rather buy them and then pay back the loan over time... that's just the way most people do it these days, particularly younger people just starting out who have no savings to begin with.  The problem with debt is that if taken on for the wrong reasons, or if handled irresponsibly, it can make your life more difficult rather than easier.

But not all debt is bad.  We are quite comfortable taking on large amounts of debt but we only take on what we consider to be "good debt" and that brings us to defining good debt vs bad debt.  We use a fairly simple definition but it has some room for subjectivity.  Good Debt results in a better longer-term fiscal situation for our family as a whole.  Bad Debt results in a worse fiscal situation.

Another way of looking at it would be asking the question:  Does the cost of paying the interest plus the principle make up for it FINANCIALLY in the long run?

Here are my thoughts on what are good types of debt and what are bad.

Credit Card Debt - Bad Debt.  Interest rates are too high and most people use credit cards to buy things that depreciate over time.  If you don't pay your credit card off quickly, the interest will eat up a lot of your money.

Student Debt - Generally Good.  Assuming you are using the the associated education to make more money than you would without the education, then yes Student Debt can be Good.  Once you're done your education, I advise to pay off student debt quickly.  I would however challenge people taking "basket weaving" classes whether those types of diplomas/degrees are worthwhile for the money and interest that they are required to pay back, often for years and years. 

Mortgage Debt - Generally Good Debt.  It allows you to choose where you live and how long you live there by owning property.  Its debatable whether a home is an investment, but the benefit of being in control of where you live and knowing that rent wont be going up every year can help you budget your money more easily.

Family Loans - Generally Bad Debt.  Owing a family member may make sense in some cases, but I'm not a fan of owing family simply because its awkward and usually one side feels they're not getting the treatment they'd like. 

Investment Loans - Good Debt.  If you can make more money on the investment than you are paying for in interest costs, this is definitely good debt in my books.  We regularly use investment loans as part of our investment portfolio.

PayDay Loans - Definitely Bad Debt.  Essentially legal loan sharking. 

Rotating Lines of Credit - Depends on the usage, but I would bet most people are using it for consumer spending.  If you use it for investing purposes, then a Line of Credit can be good debt.

Car Loan - Bad Debt.  New Cars depreciate like crazy the first few years.  Buying a car may be a necessity, but we prefer to pay off car loans very quickly or don't have a loan at all.

Consolidation Loans - Bad Debt.  Usually the lesser of the evils of loans in that consolidation loans usually have lower interest rates than other high interest loans such as credit cards or some car loans. The downside is that this often still consumer debt, just at a different rate.  Pay it off.

Kim and I both had student loans in the 10s of thousands of dollars, which we paid off within a few years once I started working. At present, we have an investment loan and we will be buying a house next Spring which will mean we will have a mortgage again.   Both of these loan-types will help better our financial situation and so we are quite comfortable having them and generally not in a hurry to pay them down.  We have no other types of debt at the moment and we intend to keep it that way.  Whenever we've had other types of debt, we've work very hard to pay it down as soon as possible.  By only having debt that helps our financial situation and doesn't hurt it, it means we don't fuss over our debt as much as other people, and we know that by paying the debt off, we aren't merely pouring our money down the drain, or lining the pockets of others.  We obviously need to make sure that the amount of good debt we have remains at a manageable level that we can be expected to be able to cover with our monthly income.  That is where budgeting comes in.