Many people include investments in their plan to help them achieve their financial goals and we often hear the question ‘are my investments working?’ Investments are a great way of achieving a far better return on your money than simply leaving it in the bank. However, with better returns come greater risks. This means that you need to keep a close eye on your investments to ensure you understand the returns you are getting. Below we have outlined the two main sources of investment income and how to calculate your actual returns.
When you’re reviewing your investments, it’s important to remember that income comes from two main sources – capital gains and interim income.
1. Capital gain (or loss)
This is the difference in the overall value of an investment from date of purchase to now (or the date that you sold it). You can work it out using this formula: (Current or sale price per unit – purchase price) x number of units) – fees and taxes
For example, let’s assume that you purchased 100 shares in Amazing Blue Widget Co. for $50 each (totalling $5,000) and then sold them for $80 each (totalling $8,000). You had to pay fees of $10 to buy and $10 to sell plus 15% tax on the profit, which works out to: (($80 – $50) x 100) – $20 – $450 = $2,530 or a return of 50.6% on your original $5,000 investment.
2. Interim income (dividends, interest etc)
This is the amount that you’ve received in interim payments over the life of your investment. It’s calculated as:
(Interim % x value of investment) – taxes
You would need to work this out for each interim payment that you receive.
For example, let’s assume that you’ve held 100 ABWC shares for three years, and that they paid dividends of 3% a year. In the first year the shares were $50 each, in the second $60 each and in the third $80 each. Your return would be: 3% of $5,000, $6,000 and $8,000 less tax, which works out to be: $485.
Your total return
This is equal to your capital gain (or loss) plus your interim income. You can then compare this to your original purchase price to understand what percentage gain or loss you’ve made.
For example, your purchase price of ABWC shares was $5,000; over three years you’ve made $2,530 in capital gains and $485 in interim returns (dividends) for a total of $3,015. That’s an increase of 60.3% over three years or 20.1% a year – not bad!
You should compare your total return with your targets and life goals. This can help you decide whether you should keep your investments or sell them.
Investments should be part of your overall financial strategy, so it’s important you seek professional advice and also make sure that you have a plan that accounts for your financial position and goals. Speak to the team at BSN & Co – we can help you review your investments, advise you regarding the tax implications of any returns and how you can structure your investments to minimize your tax liability. We can help answer that burning question ‘are your investments working for you’?