Andy over at $aving to Invest tagged me with the Single Step Personal Finance Challenge created by Mrs. Micah. The challenge is to find “one step you can take to make your financial system better or more organized.” This is my first tag!:) It’s like finally getting a Valentine’s Day card when you thought no one had thought of you:).

Well, thinking in terms of what is most efficient a move, there are two close contenders for this single step. You’d think one would be just pay off my student loan debt now so that once I am on a salary after finishing graduate school, I won’t be needing to pay over $550/month in loan interest. The only problem with paying off debt, for me, is that it easily comes back. It’s like trying to kill a zombie. I’m almost always going to need some debt. It’s the lubricant or glucosamine of my financial system, helping me move my financial joints when I need some flexibility. And the reward I feel from paying off debt too soon is very ephemeral. I feel like I’ve just “tricked” myself. It’s a mirage. Debt is intangible, disappearing and reappearing like images in clouds.

On the other hand, building income and especially boosting cashflow is extremely tangible to me and feels like a real gain. I feel I’ve really accomplished something when I’ve been able to increase my cashflow. So here I agree with another of Andy’s posts about wanting to increase his monthly cashflow to $300/month from passive income. If you have enough monthly income to live and save money off of, you’re financially free in my books.

So I’d have to say that enrolling in DRIPS (dividend reinvestment plans) is the best single step anyone can take to improve their finances, or what I call their “moneyenergy.”

Four reasons why:

• no fees or commissions
• automatic dividend/distribution reinvestment
• often get discounts (free money!)
• future source of cashflow (if you keep them reinvested until then)

There are other great reasons too, but these are some big ones. If you’ve read my other posts on DRIPs you’ll know what else I have to say about them. I currently own about 15 DRIPs. This is probably a bit too many for where I’m at right now, but that’s ok. I like knowing that I’ve got them set up and ready to go.

If you’re broke, have a tiny income (like if you’re like most students), or a sporadic income, or you have too many debts to pay off all at once, I think that investing in stocks through DRIPs is truly the most efficient way to develop future streams of cashflow. No fees will hold your money back and you don’t need $250 to begin.

I suppose I need to pass along this little tag now, and I think I’ll pass it over to… Sean at Financial Ramblings (if you haven’t done this one, yet, Sean!), The Almost Millionaire and Free From Broke. What do you guys think? What’s your “single most important step?” “The key” to your financial freedom, so to speak, perhaps?

I’m talking about Robert Kiyosaki — the author of the Rich Dad, Poor Dad series — and his
great boardgame, Cashflow 101. You can still buy this game from his own site and from Amazon.

I remember going to a couple of Cashflow 101 games when I was an undergrad. There were about 7 or 8 of us, I was the only student, and it would take only a couple of hours before someone made it out of the rat race. It was fun, a little inspiring. I was about to organize a Cashflow group on my own, and even went to buy the Cashflow game once myself - the first time my order was misplaced, but then I never got around to trying to fix it and put the order back in again. Probably because I just didn’t have enough left on my Mastercard at the time!

These days it seems some investors are not as impressed with Kiyosaki as they were four years ago. For whatever reasons, some don’t agree with all of his basic ideas - some people aren’t interested in real estate - some don’t think the quest for wealth should occupy centre stage in the same way as it does for Kiyosaki. What about you? Did you ever read any of the Rich Dad books? Why/ why not? It seems that sooner or later, investors always try to come to terms with Rich Dad:). It shows that Rich Dad, Poor Dad has become a classic just like Malkiel’s Random Walk Down Wall Street. I would spend a few afternoons in the public library devouring his book, taking notes on it, and coming back to finish it all up.

I’ve read many different kinds of finance and investment books, but I think that what Rich Dad did for me was make the whole wealthbuilding process intelligible. (This might not be saying alot, since I know the book was written in an overly simplistic format:).) What I mean is that I got that “a-ha” feeling: when you finally figure something out, or when the bigger picture clicks. I think I was able to see a road map of some sort after reading the first five books in his series. But I haven’t kept up with all the books that he writes with his partners or which his colleagues write under the Rich Dad brand.

It would be great to hear from other Kiyosaki fans. Have you gone to any of his lectures? Do you still play Cashflow 101 or 201 or participate on any of the RichDad forums? The game is expensive, but I remember it being well worth it.

Also known as royalty trusts, income funds and unit trusts, income trusts are a special type of investment vehicle that are traded on the stock exchanges and pay out on a regular basis to their unitholders. As far as I know, these are also a uniquely Canadian product (if anything similar to income trusts exist in the U.S. In Canada, please let me know!). Canada has, perhaps, hundreds of them and they have really taken off as investment vehicles since about 2002 or so.

Examples

REITs (Real estate investment trusts) - e.g., RioCan Real Estate Investment Trust, Boardwalk REIT
Oil and Gas trusts - Vermilion, Harvest Energy, Provident Energy, Pengrowth, ARC Energy
Diversified Investment Trusts - Enervest Diversified Investments

You can recognize these trusts by their tickers, which usually end in .UN. For example, the tickers of some of the above trusts are: REI.UN, HTE.UN, EIT.UN.

What Are Income Trusts?

Income trusts are simply a different form of business structure than a corporation. They act like regular securities and trade on the stock exchange. In fact, some corporations are solely structured as trusts. A good example of this is the BFI Waste Management company in Canada (BFC.UN). The only difference is that pay their own taxes differently than regular corporations do. As a result, they are able to offset much more cashflow to their unitholders. Distributions are made monthly rather than quarterly.

What’s So Great About That?

Here’s what I really like about trusts.

1) You get paid monthly (it’s usually on the 15th; some pay on the 30th; even less have their own dates)
2) The yield is generally considerably higher than with regular corporations. In this case, it doesn’t mean that the company is under greater pressure, and it’s not a sign of weakness in their financials. They’re simply structured this way.
3) Because of 1) and 2), income trusts are ideal for pooling your money into an account and letting it accrue there as cashflow you can use later for reinvesting or as straight income. It’s like getting a paycheque since they come every month. Ideally, you could have a sizeable enough account full of these trusts and use it to live abroad for half the year.

Not All That Glitters…

Don’t get too excited yet. At least in Canada, by 2011, many of the income trusts (no one knows which at this point; they haven’t all decided yet) will convert back to a corporate structure. Some won’t. Some already have (eg., Transforce Income Fund (TIF.UN) is now simply (TIF).) The reasoning behind this is more complicated than I have the energy to explain right now, but the basic point is that the tax law changed, and so there will be less benefits to corporations for existing as an income trust. For investors, this means get them while the getting’s good! And pay attention when 2011 rolls around.

Other thoughts? Do you know of any good American or UK income trusts, or similar vehicles? I’d love to hear about it.