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Friday, February 12, 2010

Holding debts can be healthy: here’s the how

My latest posts were quite provocative but they help me to feel better. And I have to say, I am feeling much much better now lol. I wasn’t expecting any reaction from my too much provocative posts, but the comment left by Teeth make me think of this – I am being read lol.

Ok, I hold some debts. And so what? My debts are not disturbing me at all. By having debts, I am helping the Canadian economy. Because a low amount of debts do help the economy. You could believe that having debt is not helping me any way. You might be right, but I think you are wrong! And here’s my point.

In life like in everything else, you need to know what you want. Right now, what I want is to reach 100 000$ in assets, with or without debts. Just that. I am just a nobody dreaming of having 100 000$ in assets. Is it a shame? I just want to have fun with my money and paying debts is not fun. It’s actually really boring.

Here’s my debt situation:

8 517.94$ at 4.75% = 404.60$ in annual interest
4 817.03$ at 3.5% = 168.60$ in annual interest
4 436.21$ at 3.9% = 173.01$ in annual interest
3 587.13 at 8% = 286.97$ in annual interest

+ 10 500$ (RSP loan of Monday) at 3.25% = 341.25$

Total in annual interest = 1 374.43$

Ohhhhhh outrageous debts! Outrageous interest! Oh lala.

Let’s get a straight overview of the situation.

Currently, my annual dividend income is of 3 323.59$. This is of course, before taxes. But even after taxes, I probably earn the equivalent of 1 374.43$ in dividend income, if not more.

So let’s calculate:

1 374.43$ (annual interest) – 1 374.43$ (annual dividend income) = 0$

At the end, I do not pay any interest at all from the money I had borrowed. This is free money! Pretty amazing! This is a trick I learn by reading Derek Foster. Now you understand why Derek Foster is a bestseller author, don’t you? Derek Foster is the best friend of all small investors like myself.

The plan is making sense as long as I can afford making the minimum payment for each loans I am involve in. I have a five star credit score, I do not want to loose that. I can afford making the minimum payment for everything. But before getting involved in a early retirement, all of my debts will be fully paid off. Of course. And if, at a point, I couldn’t afford making the minimum payments on my loans anymore, I would simple sell some of my investments.

After reading all this, if you still think that the whole plan is not making any sense, it’s because you might be one of them. You might be a BMO Bank of Montreal employee after all.


teeth said...

I don't work for BMO, but the debt is still a major problem. What you write about being able to make the debt payments is absolutely right. You are able to cover your interest payments with the money from your dividends, so it is great.

But, the major problem is that you are not taking into consideration what will happen if (when) the value of the stocks that you have drops.

For example, if you have 20k in debt and 66k in stocks, your net value is 46k. If the stock value drops by 25%, then the value of your stocks will be about 50k. Your debt still stays the same at 20k, but your net value is now only 30k, so your net value has dropped by 35%. This is the danger of leverage.

If you get the loan, your debt will go even higher. So, if you get a loan of 10k and you buy stocks, your stock holdings will be 76k and you debt will be 30k, so your net worth will still be 46k. If the stocks drop by 25%, your debt stays the same, but your stock value drops to 57k. Minus the 30k in debt, and you are left with a net value of only 27k, so your net worth drops by 42%. If the stocks drop in value by 60%, you are left with ZERO!!!

Now, as for the loan, as I said before, the chance that you will get it is very, very low. Why? Because you have no assets. Your stock holdings are not valued as collateral assets, meaning that you cannot borrow money against them, unless you open a Margin Stock trading account. Your job situation is precarious as well, so the loan is very unlikely to be granted. This is a good thing, trust me.

Sunny said...

Good thing that you don't work for BMO. You sound pessimiste on my success. My diversification is what will make a major difference at the end. I think I will succeed, no maker of what you think. The possibility exist and is there, but my portfolio won't drop by 25%. If I got refused for the loan, another bank will get my business. That's all.

Sunny said...

I find you very annoying by the way. If you just have negative comments to put on my blog - please don't post anymore.

Anonymous said...

nice post. thanks.


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