Ben Franklin Didn't Quite Get it RightWritten by Terry Mitchell
When Ben Franklin said "a penny saved is a penny earned", he didn't quite get it right. Actually, a penny saved is worth more than a penny earned. Do you find this statement shocking? I am about to prove to you that what I'm saying is true. Most people erroneously believe best way to strengthen their financial health is to increase their income. On contrary, saving money by cutting costs will get you there quicker. You see, it's very simple. When your income increases (with some exceptions like part of it you put into your 401k), that extra money is taxed. On other hand, any amount you save by cutting costs is not taxed. Therefore, $20 saved by cutting costs is worth more than a $20 increase in income. The following (although over-simplified) example will illustrate this principle. Let's suppose that Jack and Cindy have identical jobs and incomes. Let's also suppose
| | Avoiding Double TaxationWritten by Peter F. Baigent CFP, CLU, CHFC, RFP.
Many people who buy mutual funds and other stocks often end up paying tax twice when they finally sell security. This is because they do not keep track of their "average cost base" per share. This problem is very prevalent on investments when dividends have been reinvested in same security. Most mutual fund investors reinvest their dividends in more shares of same fund. Many large corporations offer dividend reinvestment programmes that allow shareholder to acquire more shares of corporation directly without any brokerage charges.While reinvestment of dividends is usually an excellent idea, it does require some record keeping on your part to avoid double taxation. Many financial planning firms provide this tracking as part of their service. In my experience almost every case that I have looked at after a sale, has resulted in reinvestment of dividends not being accounted for. For example, let's say you bought units or shares in XYZ mutual fund in 1990 for $ 10,000 when shares were $5 each. So you got 2000 shares. At end of year, fund will declare a dividend equal to total of its realized capital gains, dividend and interest income etc. less fund's expenses. Let's say this dividend worked out to 30 cents per share. On 2000 shares that is a $600 dividend or 120 more shares if unit value hasn't changed since you bought into fund. You will receive a T3 slip in March for that dividend whether you take cash or additional shares for it. If it is a mutual fund corporation you will receive a T5 slip for dividend declared at its fiscal year end. The tax effect is same. The point to understand here is that you will be paying taxes that year on that dividend whether you receive it or not. If you reinvest dividend in more of same shares, for tax purposes "average cost per share" has now risen by 30 cents per share. Your total investment is now $10,600 (2120*5.00) from an income tax point of view because you will already have been taxed in current year for $600.
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