Jun 292013
 

I’ve always been told that I should keep my money in a savings account and that’s what I’ve been doing all these years until recently.  I’ve had a change of opinion and dumped all my money into my TFSA and purchased shares in several funds yielding at least 10% annually and the pay monthly.  The plan is to reinvest the dividends every month until I have enough dividend to support my lifestyle.  It was a little scary at first and it took a few minutes to hit that transfer button from my bank account but it really isn’t that bad.

I currently only have a checking account and I keep $1000 in there at most.  That’s enough to cover my monthly bills for the car, insurance, phone, etc…  What I do is I charge everything to my credit card (gas, groceries, lunches, pack of gum, everything).  What this does aside from collecting a lot airline miles points is makes it easier to keep track of your spending and you don’t pay interest if you pay your bill off every month.  When I get paid, I pay off the credit card first and then top off the checking account to $1000.  Anything after that goes into my investment account.  If I ever need more than $1000 cash, I have my line of credit.  I can either wait for the next pay check to pay off the line of credit or I can sell some shares to pay it off.  Try doing that if all your money is invested in a home  :p

I used to trade quite a bit but aside from a few big winners, I pretty much broke even on everything else.  On top of that, it was very time consuming.  I’d come home from work, spend hours looking at stock charts, putting in my orders for the next day and watching the share prices while I’m at work.  As a result I had little time for anything else.  I’ve decided to switch to dividend investing.  I bought several funds that pay you at least 10% a year for owning them.  The only thing I do now is figuring out which fund to reinvest the dividends every month.

I admin that 10% growth is rather slow but it’s the reinvestment that speeds it up.  The secret is compounding growth.  It’s how credit card companies get you.  If you owe $5000 in credit card debt and you make the minimum payment every month, you end up paying over $8000.  This is like compounding interest except it works in your favour.  Everytime you reinvest your dividend back into the funds, your next dividend will be bigger than the last.  Let’s say you have a maxed out TFSA at $30,000 and you put it into funds that pay a dividend of 12% a year (just using that as an example, nice round number.  Sometimes it’s higher, sometimes it’s lower) .  Now the funds I’ve invested in pay their dividends monthly or quarterly.  I’ll use the monthly funds in my example.
The first month, you get a 1% dividend of $300.  Reinvest it back into the funds and you have $30300 worth and the following month, you’ll get a 1% dividend of  $303.  Put it back, you’ll have $30603 worth paying you a dividend of $306.  So on and so on.  In the first year, you’ll have made almost $4000.  Using this method of investing, your money will almost double every 5 years without adding any more of your own money into it.

I know what you’re thinking at this point, what if the price goes down.  Don’t you lose a lot of money?  People often equate investing with gambling but it’s not.  I don’t know of any sort of gambling where you don’t lose until you cash out.  You don’t lose money until you sell.  The great thing about dividend reinvesting is when the fund drops in price, it’s actually an opportunity to buy more shares than you normally would at a higher price.  And you’re buying it with the money they paid you for owning them.  If the price goes up, you can sell some of the shares, take the profit and put it into the funds where you’re down.

In case you’re wondering how this works out over 25 years, it’s about $360,000… without adding more of your own money, all from $30,000.  For me, this would be considerably higher as I do add money from my day job every month.  What am I gonna do, let it sit in a bank and have it lose value due to inflation?

That’s it for now.  Don’t take this as investment advice but this is what I’m doing.  It’s a bit scary at first because I’ve always lived with the security of having money in the bank until I realized what a stupid idea that was as your money doesn’t grow faster than inflation.

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