Financial Planning Friday: 2 ways to give yourself a raise in 2018

January 26th, 2018 by Anchor Bay Capital's Investment Team

Do you want to earn more money in 2018?  Here are two ideas that you can do right now to organize your money so that it is working harder for you and putting more money in your pocket.

1. Open a high-yield savings account for your cash

Do you have cash sitting in the bank?  If not, check out this former post: FPF: Do you need some cash?.  If you have a bit of cash stuffed away, consider this:  The average savings account across the nation pays only 0.06% in annual interest as of January 22, 2018.  FDIC insured money markets are not much better with an average of 0.10%  This means that if you have $10,000 sitting in a savings account in the bank you will earn a meager six dollars of interest this year.  You definitely need to get paid more than this!  You can always evaluate if you would like to take more risk with your money to get a higher return.  At Anchor Bay, we can build a fixed income portfolio that staggers bonds over a short period of time and provides better yields than most cash equivalents, but you are taking a bit more risk with the bond market.  For cash, consider high yield savings accounts.  You can check out this NerdWallet link to see a comparison of current rates on these types of accounts.  There are online bank accounts such as Ally, Synchrony, and Barclays that are paying as high as 1.50%.  Again, if you have $10,000, you are now earning $150 this year and you just gave yourself a $144 raise.

2. Build passive income with dividends

Every bit of extra income helps, right?  So this year, try setting a goal of investing enough money to build a passive income stream.  A great way to collect passive income is through stock dividends.  We know that stocks are a great investment for long term goals because over time stock prices typically increase and the value of our money increases through appreciation.  However, the other way that we make money with stocks is through dividends.  Dividends are profit distributions from a company to the shareholders.  Typically companies declare a dividend each quarter.  This means that if you hold a stock throughout the year, you should be able to collect 4 dividend paychecks in 2018!  

I highly recommend that you work with an advisor who specializes in dividend paying stocks to help you set up your income stream.  If you are just starting out, remember that the dividend will be a percentage of the money that you have invested, so it takes time to set aside the money that you need to generate your passive income goal. Here is an example of a stock creating a dividend paycheck:

1. Pick an annual income goal.  Let’s say that you would like an additional $2,000 this year for your vacation.
2. Research stock dividend yields.  Let’s say Stock A is trading at a price of $165.  You want to find the stock’s forward dividend yield.  Stock A has a forward yield of $6.  This means that the stock is yielding $6/$165 = 3.64%.
3. Based on this yield, you would need to invest $54,945 to generate your $2,000 of income.  ($2,000/3.64% = $54,945)

This example is completely hypothetical, but it illustrates the way you would receive dividend income from a stock.  You never want to put all your money in one stock, so it is important to build a portfolio of stocks that together produce the yield that you need for your goal.  Remember, this strategy may take time, but if you stick with it, you will have an additional income stream that hits your bank account each quarter.

Bonus Idea- Give yourself a raise in the future

Make 2018 the year that you contribute to a Roth IRA or a Roth 401(k).  You may already be putting money in your retirement plan, but the power of a Roth account can be a real game-changer when it comes to your income in retirement.  By contributing to your Roth you are effectively giving yourself a raise in the future because you will be able to take out money in retirement completely tax-free.

Let’s say you withdraw $100,000 in retirement to live on and your marginal tax rate is 28% (Who knows what tax rates will really be when you retire?).  If all of your money is subject to taxes you will net $72,000.  However, what if you withdraw $50,000 of money that is subject to tax and $50,000 from a Roth?  Now you have withdrawn the same $100,000 and you get to keep $86,000. (The $50,000 from your Roth is not subject to tax, so you only pay taxes on $50,000 which is $14,000)  You just made an extra $14,000 in retirement!

Hopefully 2018 is a profitable year for all of you!  We are always happy to talk through strategies that can help increase your income or help save you money!  Also, if you would like to know more of what is going on at Anchor Bay Capital, follow our Facebook page here.