PODCAST 169
SAFE DIVIDEND INVESTING
23 May 2024
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 169, on May 23rd of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering one interesting investment question.
The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful, self-directed investors.
QUESTION #1
WHY CONTROL OF EXPENSES HELPS ACHIEVE FINANCIAL INDEPENDENCE?
Are you going broke trying to “look rich”? Then the way you are handling your money is a problem to you achieving wealth.
I believe all those who invest hope to achieve financial independence. They want to eventually realize enough of a reliable income from their investments that they no longer need to be employed or worry about outliving the income generated by their investments. The careful management of expenses is as critical as the careful selection of investments.
To reach financial independence, it is recommended that you start accumulating cash savings as early in life as possible. You will use this cash to invest in carefully chosen financially strong, high dividend-paying stocks. Such stocks will start paying you ever increasing dividends in tandem with ever increasing share prices. By steadily supplementing your contribution to your savings with dividends, you will be surprised how rapidly your portfolio will double again and again over your lifetime.
However, before you invest in stocks you need to use your savings to pay off all those debts with high interest rates. It is illogical to be paying credit card interest of 20% or more when you are only receiving 6% to 8% in dividend income.
There are a few debts that you do not want to pay off. For example, if you are lucky enough to still have a 2.5% mortgage rate, it would not be logical to pay off that mortgage if you can earn a 6% to 8% dividend return by investing that available cash into financially strong stocks.
Being mindful of interest rates, also includes your spouse’s debts. Married couples are usually responsible for one another’s debts. Financial compatibility and agreement on how to handle debt is important for a healthy marriage partnership.
Surveys have shown that 90% of us view financial responsibility by a prospective spouse as an appealing trait. 53 % of us said we would avoid a relationship with someone who had a debt burden. 60 percent also said they had been in relationships with partners who were reckless with money, and they now avoid relationships with the financially irresponsible. While infidelity may be the number one reason for divorce, the number two reason is money.
Until you are free of high interest obligations and have achieved financial independence, it is wise to question every dollar spent. The people, I know, who have worked hard to accumulate millions of dollars in assets, don’t drive overly expensive show cars, wear expensive designer clothes, live in 10,000 square foot mansions, or engage in an overly extravagant lifestyle. Before they spend a dollar, they think about the realizable benefit they will receive from spending that dollar. These are not impulsive people.
In the legendary1996 book, “The Millionaire Next Door” by professors, Thomas Stanley, and William Dank, the authors describe how they began studying the wealthy. They started their research in what they thought was the most logical place, the well-to-do areas across the USA. They soon discovered that people in the impressive upscale homes who drove expensive cars rarely had a net worth in the millions of dollars. The learned that the foundation of that lavish lifestyle for these seemingly wealthy people was not a high net worth, it was high debt.
The cost of creating the illusion of wealth diminishes any chance for these posers to ever achieve real wealth and financial independence.
What expenses would I cut if I were one of those high-income, low wealth individuals, maxed out on my credit cards, struggling to keep from sinking deeper into debt?
Accommodation expense is a major drain on your income.
If you are spending over 40% of your income on accommodation, then you could be classified as “house poor”. If you are a homeowner in such a situation, consider selling and buying a more affordable residence.
You may be able to apply the equity you might gain in the sale to paying off debts and adding it to your investment portfolio where it will start to generate dividend income. With a smaller house, monthly accommodation expenses will shrink because of lower taxes, heating, cooling, maintenance, and insurance costs. If possible, try to minimize your commuting costs by living closer to your work or to a major public transportation corridor that you could use instead of driving.
If you are no longer working or have a job that allows you to work remotely, consider relocating to another city. Living in most large cities is expensive. The average price of even a small home in the big city can exceed $1,000,000. Even to rent a modest apartment can exceed $3,000 per month.
Moving to a small town is a viable option. There are towns where you can buy a house for less than $100,000 or rent an apartment for less than $1,000. An example would be Elliot Lake, a town of 11,000 people, in Northern Ontario. Thousands of retirees have moved there.
While moving away from family and friends, can be unappealing, drowning in a mountain of debt is stressful and unhealthy. Thanks to the internet the cost of maintaining daily social contact with family and friends anywhere in the world has become affordable. This opens the real possibility of even moving to another country where living is much more affordable. Internet access to your banking and investment accounts from distant locations is no longer different then what you now experience.
Automobile expense is another major drain on your cash flow. Do you own more than one car? Each vehicle can be costing you more than $8,000 a year when you consider insurance, fuel, parking, repairs, car payments, licensing, and maintenance.
Interest on new car loans are now averaging about 8%. Some people are even paying as much as 40% interest for a loan on a used car. It is critical that you shop around for the best interest rate and carefully read your purchase agreement.
If a new $60,000 car loses between 20% and 30% of its purchase price as soon as you drive it off the dealer’s lot, consider letting someone else take this depreciation loss. Buy a used car with low mileage that is a few years old. It can be a cost-effective purchase. Especially if you plan on keeping it until it accumulates 200,000 kilometers. With the money you have saved in buying a used car, you will be able to keep that car in good repair.
Vacations can be expensive. If you go deeply into debt for a vacation, then you should question whether you can afford such a vacation. While everyone needs a break from their normal routine, you do not want to pay for it with increased debt stress.
Can you plan an affordable vacation? Trading houses with someone for a few weeks in an interesting part of the country is possible. There are services that arrange these exchanges.
Travelling by car to explore areas you have never previously explored, can save thousands of dollars while providing an escape from your routine.
Once you achieve financial independence then your vacation time can be as long as you want it to be. You can go away for months to exotic locations for what it used to cost you to go away for two weeks. Once again, the internet allows you to communicate and handle your investing and finances from anywhere.
Restaurant Dining is expensive. Eating fabulous meals, paired with exquisite wines, at renowned restaurants is an expensive form of entertainment. The bragging rights may make you feel good for a few days. However, In a week when the charge show up on your credit card it may be difficult to remember exactly what had been so wonderful about the experience. Expensive dining can easily add up to thousands of dollars in a year.
Communication Costs are a necessity but can be controlled. - Cable television, satellite television, telephone and internet access over a year can cost thousands of dollars annually. Negotiate with the communication suppliers. Play one supplier against the other. Never accept the first price they offer for their services. Tell them their competitors are offering almost the identical service for a third less. This is often enough for them to find a way to handle offer a less expensive service.
Technology is transforming rapidly and sometimes new technology does reduce communication charges.
Do not assume the price you are now paying is the one with which you should be satisfied. For example, it is possible to obtain cell phone service for less than $20 a month if you own a cell phone that has been paid for. Most suppliers will want to charge you closer to $50 for cell phone service and will do the best to cell you a new phone with all the latest gadgets. Do you really need to go in debt to acquire the latest iPhone?
Communication companies, to stay ahead of inflation, will sneak in a small price increase every year. Read your monthly statements carefully. They know that most customers will neither notice nor challenge any increases. They expect a customer’s inertia will stop them from shopping for competitive rates.
Do not expect them to notify you of any price decreases. You must ask for them.
If you have internet service, it is now debatable whether you still require cable television service. Online streaming services, hundreds of internet news sources and entertainment services can meet most entertainment needs.
Online telephone services can reduce telephone costs. Consider buying a phone service like MagicJack where you can receive 5 years of North American wide phone service for a one-time charge of $165.
Of course, there are those who will constantly remind you of the cost of all the nonessential pleasures like tobacco, coffee and alcohol consumption. These can be pleasurable social habits but they can cost you thousands of dollars over a year. It is possible to live without them.
Buying books and magazines can also be expensive. Printed material can easily be substituted with their less expensive even free electronic publications. Public libraries are also an option as are those who sell used books on websites like Amazon.
Once financial independence is realized and you are no longer striving to achieve it, your concern then is just living within your dividend income. The surplus money over and above your living expenses can then be spent freely. However. I must warn you, having made so many sacrifices to achieve financial independence you may never feel the same way you used to feel about spending money. The logic of always weighing the benefit of a purchase versus its cost is a hard habit to break once it is internalized.
Our society conditions us to expect to work for at least the first forty years of our lives. It does not attempt to show us or encourage us to achieve financial independence as early in our lives as possible.
Investing and money management is not a topic taught in secondary school but it should be. It is never too late to educate yourself about investing safely. My investment guides, my podcasts and my stock scoring software will help increase your investment knowledge. Go to my website www.informus.ca for more information.