Standing An Expense On Its Head

Peter's picture

A great trick that I frequently use to get my frugal juices flowing is to look at my expenses in a different light. I've written before about seeing unnecessary expenses as potential income. Recently, however, I've come up with an even better perspective shifting trick that really hammers home the power of saving ... especially on those recurring monthly expenses. Let's see how we can get our savings to pay us dividends!

Negative Dividends?

One great method for generating a stream of passive income is through dividend investing. One of the main reasons is that dividends are so favourably taxed in Canada. In fact, in the lower tax brackets, you don't really pay any tax at all on dividends!

Another personal finance item that is tax free is savings made on expenses. If you cut your monthly expenses by $100, and since this is after-tax money, it goes right in your pocket, tax free! So reducing your expenses and earning dividend income are actually quite similar.

Since dividends are a source of money coming in and expenses are a source of money going out, its not really that much of a stretch to think of recurring expenses as negative dividends.

Or another way to think of it is that an unnecessary expense is a potential dividend.

The Math

So, if you can make that mental leap, then the next step is to look at our expenses in this new light by crunching some numbers.

Let's assume that an imaginary dividend paying stock yields around 3% each year. That would mean if this imaginary stock had a market price of $100 dollars, it would generate $3 each year in dividends.

Now let's pretend we've got a monthly cable bill (I always pick on the cable bill!) of $50. If we decided to go with a cheaper cable plan that costs, say, $30 each month, we'd save $20 each month.

By comparison, we'd need to own $8000 of our imaginary stock if we were to have that same $20 per month coming in as dividend income. So, essentially, saving $20 each month is the same as having $8000 worth of dividend paying stock!

Too Big Of A Leap?

It might seem like a bit of a stretch to make this sort of comparison but if you've ever tried to build up a source of passive income using dividends, you'll see what I mean.

Dividend income usually starts out as relatively small trickle of money coming in. As you add more to your portfolio, by reinvesting your dividends and increasing your savings, slowly but surely it increases. I can assure you, it usually increases by much less than $20 per month - especially when you first start out!

Put $8000 In Your Portfolio!

By standing expenses on their heads like this we can really start to see the power of saving money.

So, see if you can find a $20 recurring expense in your budget somewhere. If you can find a way to cut that expense, you'll effectively be giving yourself an $8000 portfolio boost!

An even better idea is to start investing that new $20 each month so it can start producing returns of its own ...

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