Personal Finance

Do you include investment returns as part of your "income"

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  • Jan 21st, 2014 3:13 pm
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[OP]
Penalty Box
Apr 16, 2012
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Do you include investment returns as part of your "income"

Say you have $200 000 in investments and a regular job at $50 000 a year.

Average S&P 500 gain is 8%. So that $200 000 is expected to generate $16 000 before tax.

That $16 000 is investment income (lower tax rate). So in real income, it would be equivalent to an additional $21 000 more or less.

$50 000 + $21 000 = $71 000

Therefore, can you succinctly say that your income is equivalent to someone making $71 000 a year with no savings?

If you have a friend who makes $71 000 a year with no savings, you can "keep up with his lifestyle" indefinitely, without dipping into your savings or going into debt? In the theoretical sense.
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I would only count it as income personally if I was taking out that money and actually using it.
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Nov 13, 2007
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You don't have that money until you sell the stock. If the stock crush by 50%, does that mean you make -$50,000 this year.

I don't even count dividend as my income because they go to DRIP. I don't see them in my wallet yet.
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superping wrote:
Jan 21st, 2014 9:51 am
You don't have that money until you sell the stock. If the stock crush by 50%, does that mean you make -$50,000 this year.

I don't even count dividend as my income because they go to DRIP. I don't see them in my wallet yet.
So you don't count as income, the amount of your salary that goes to pension, RRSP, TFSA, CPP, taxes?
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techcrium wrote:
Jan 21st, 2014 9:30 am
Say you have $200 000 in investments and a regular job at $50 000 a year.
If you have a friend who makes $71 000 a year with no savings, you can "keep up with his lifestyle" indefinitely, without dipping into your savings or going into debt? In the theoretical sense.
It depends as the money you are making from stocks is just on paper until you sell it, so it will not add anything to your immediate "lifestyle" if you just hold it. If you can cash out the gains each year, and maintain 8 % each and every year, then theoretically it would go to your income... but keeping this up with no down years is a stretch.

Take 2 people in an identical job making $71K per year. Person A puts away 25% from every paycheck into RRSP, TFSA, savings plan etc... while person B saves nothing. Person B will have the better apparent "lifestyle" since they will have more disposable income on a weekly basis. Person A will be better suited for the future and retirement, but won't be able to keep up with the spending habits of the other.
[OP]
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rob444 wrote:
Jan 21st, 2014 10:15 am
It depends as the money you are making from stocks is just on paper until you sell it, so it will not add anything to your immediate "lifestyle" if you just hold it.

Take 2 people in an identical job making $71K per year. Person A puts away 25% from every paycheck into RRSP, TFSA, savings plan etc... while person B saves nothing. Person B will have the better apparent "lifestyle" since they will have more disposable income on a weekly basis. Person A will be better suited for the future and retirement, but won't be able to keep up with the spending habits of the other.

No I am asking:

Take 2 people who spends exactly the same.

One is a guy making 71K a year with no savings yet. (perhaps he graduated or something). Another is a guy making 50K a year with 200K assets invested in S&P500.

Are they equal in the theoretical sense?
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techcrium wrote:
Jan 21st, 2014 10:19 am
No I am asking:

Take 2 people who spends exactly the same.

One is a guy making 71K a year with no savings. (perhaps he graduated or something). Another is a guy making 50K a year with 200K assets.

Are they equal in the theoretical sense?
I would say no, because a salaried 71K is considered constant and safe, while 200K in assets invested is risky and can fluctuate significantly.
[OP]
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rob444 wrote:
Jan 21st, 2014 10:21 am
I would say no, because a salaried 71K is considered constant and safe, while 200K in assets invested is risky and can fluctuate significantly.
Alright so that's exactly what I am asking.

So between making $71K a year with no assets or making $50K with 200K in assets, you would choose 71K a year right?

Assuming equal incremental growth in income (e.g. additional 5K each year)



So how much investment assets to income ratio would sway you the other way?

How about 65K income and no savings vs 50K income and 200K savings?
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techcrium wrote:
Jan 21st, 2014 10:25 am
Alright so that's exactly what I am asking.

So between making $71K a year with no assets or making $50K with 200K in assets, you would choose 71K a year right?

Assuming equal incremental growth in income (e.g. additional 5K each year)



So how much investment assets to income ratio would sway you the other way?

How about 65K income and no savings vs 50K income and 200K savings?
Question is totally dependent on your risk tolerance and how confident you are as a good investor. Most people like safe and secure so would choose salary over depending on stock market returns for their income. It also depends on the person's age and if they are just starting out working, or are closer to retirement.
[OP]
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rob444 wrote:
Jan 21st, 2014 10:30 am
Question is totally dependent on your risk tolerance and how confident you are as a good investor. Most people like safe and secure so would choose salary over depending on stock market returns for their income. It also depends on the person's age and if they are just starting out working, or are closer to retirement.
Assume you are a 18 year old guy, so you have plenty of "income earning" horizon left over.

For you personally, you would take 71K (no assets) over 50K (200K assets). That's fine.


How about 65K (no assets) vs 50K (200K assets)?
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I personally have no problem considering that to be part of my 'income', but would only consider the actual earnings of the company to be my income. Not P/E multiple expansion.

For instance, if I invest in the TSX Composite Index today, for every $14,000 I have invested, the underlying firms "earn" around $1000 per year. As an owner of these companies, I have no problem considering that to be my income.

However, if the TSX were to, for instance, advance to $25,000 while still only earning $1000/year -- I wouldn't consider myself to have had an extra $11,000 in income. Even though, obviously, the 'market value' of my portfolio would have increased, in such case, by $11,000.
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techcrium wrote:
Jan 21st, 2014 10:33 am
Assume you are a 18 year old guy, so you have plenty of "income earning" horizon left over.

For you personally, you would take 71K (no assets) over 50K (200K assets). That's fine.


How about 65K (no assets) vs 50K (200K assets)?
If I was 18 then most likely I would take the higher salary, since at that age would have zero experience in investing and would probably lose half the assets anyways trying to make a high return on them.
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techcrium wrote:
Jan 21st, 2014 10:33 am
Assume you are a 18 year old guy, so you have plenty of "income earning" horizon left over.

For you personally, you would take 71K (no assets) over 50K (200K assets). That's fine.


How about 65K (no assets) vs 50K (200K assets)?
Your question is a bit flawed. Are you asking if he would take $200K? I bet he would. I would take the $200K, then find a job that paid more than $50k. I would have to work 10 years at $50K before then $71K option would catch up.
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rob444 wrote:
Jan 21st, 2014 10:30 am
Question is totally dependent on your risk tolerance and how confident you are as a good investor. Most people like safe and secure so would choose salary over depending on stock market returns for their income. It also depends on the person's age and if they are just starting out working, or are closer to retirement.
I agree that most are risk averse, but don't quite agree with your conclusion that most would choose the $71k option. Having $200k in the bank is a safer option than having a higher salary.

The way the OP phrased his question, assuming you are starting off at 18 years of age, with $0 in the bank, you have basically 2 job options:

Job 1: $71k annual salary
Job 2: $200K signing bonus + $50k salary

Which would you choose?
[OP]
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bruizeman wrote:
Jan 21st, 2014 10:49 am
I agree that most are risk averse, but don't quite agree with your conclusion that most would choose the $71k option. Having $200k in the bank is a safer option than having a higher salary.

The way the OP phrased his question, assuming you are starting off at 18 years of age, with $0 in the bank, you have basically 2 job options:

Job 1: $71k annual salary
Job 2: $200K signing bonus + $50k salary

Which would you choose?
Yes pretty much, except that the premise is that you cannot just "find" another job that paid more than $50K.

Note: 200K signing bonus is tax free of course.

Let's say you are worth $10 an hour and somehow magically landed this crazy job offer. If you were to leave both offers on the table, you would go back to your McDonald's wage job.

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