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Sunday, September 5, 2010

The importance of keeping a balance between Debt, Asset and Wage

This last Friday, I almost reached the 100k in investment assets. At this point, I am very close my goal and I think that to just add up a little in order to reach that famous 100k idea of mine, I will be investing – really soon I hope – around 2 000$ in the Claymore Gold Bullion ETF (CGL). This investment won’t bring any monthly or quarterly dividend, but maybe an annual distribution. In my life so far, I had been over-excited lol over 2 things: reaching 100k in assets and reaching the equivalent of 400$ per month in dividend earning. As for the 100k, I am almost there, and when it come to the dividend income, I am currently 369$ per month (this excluding RSP). Because with the dividend earn inside my RSP portfolio, I am at more than 400$. But since the dividend earned inside RSP cannot be touch before retirement without penalties, I am not counting them in the dividend earnings. That’s why I am currently stock at 369$ per month or, if you prefer, an annual 4 428$.

I already own some Claymore Gold Bullion ETF (CGL) inside my RSP investment portfolio but not outside. Adding more units of Claymore Gold Bullion ETF (CGL) will help stabilize the value of my portfolio. Gold is always a good investment. The TSX may have exceed the 12 000 points on Friday, but will still in it. The recession is not over. So better to keep it safe and diversify. I won’t feel comfortable going in stocks only, but investing indirectly in gold is my way to diversify the whole thing.

As you can see on the previous post, I update my debt situation. I am now at 41 712.83$ in debt. My CIBC Visa card at 3.9% interest rate over a credit card balance transfer had been paid off. I am currently working at paying off my TD credit line – the one at 8.50%. I only have a balance of 974.84$ to pay – might be just a bit more now because I use my credit line this weekend but no matter what, I will be able to pay it all with this upcoming paycheck of this week. This upcoming payment will bring my debt down to 40 738$. Still quite high, but nothing to worry about since my investment portfolio worth more than 99 000$. I can pay more than 2 times the amount of debt that I own (this including RSP money…).

Of course, having 40 738$ in debt is quite a lot no matter what and I won’t say the opposite. The interest paid over the debt is quite huge on an annual basis. We are talking here of 2 273.59$ in interest money. Yes, it’s a lot. But I have a plan! Just like I taught, I didn’t receive any new offer this month coming from CIBC Visa for a credit card balance transfer. It was a one time deal. In January, I have a 7 974.10$ at 4.9% that is ending in January (another credit card balance transfer), this one at TD. How do I plan to cut off the interest paid on my debt? By using margin.

I talk about using margin previously and said it was a no-no. But I have investment AND debt so why not taking advantage of margin? Especially knowing that the interest rate is only of 3.5% at TD Waterhouse. This is not a new idea and had been bring by another blogger. The idea is to use the margin money to pay off some debt and one pay, the credit line would stay debt-free in case of a margin call.

This is what could happen in January (or even before who knows) if my margin got approved:

1) Transfer of 5 000$ from my TD credit line to my TD Visa (leaving 2 974.10$ to pay)
2) Use the saving of October-December 2010 to pay off the amount left 2 974.10$. (This meaning no new investment because of the wage I am living on right now).

Depending of the money available on the margin, I could used the money left to pay off my RSP credit line. The payment would transform the RSP credit line into a regular credit line (at 11.5% interest rate – very bad for a credit line). I could use the money to pay off the margin in case of a margin call.

Also, always depending of the amount available, I could use the margin to pay off my newest credit line of 10 000$ at 7.27%. But this is something else.

If doing this, it would be important not to use the credit line anymore and remain debt free on them. In case of a margin call, money needs to be available immediately.

At this point, I am still thinking about the margin – it’s something I keep in the back on my head. I am not ready for margin and it’s not something I really wanted to get involved in, but the door stays open. As for my next investment, I am not in a rush. I prefer to keep everything simple so I won’t loose myself in debt. I got what I wanted with my latest credit line at 10 000$, I won’t go deeper into debt (kind of funny reading this back while writing, because I said kind of the same thing after receiving my 10 000$ RSP credit line just last March…) lol… But this time, I am serious about it, going too in deep in the red would = danger.

While dealing with debt, it’s important to keep a good balance between debt, assets and monthly salary. I am pretty good at balancing – I guess that’s why I got my newest credit line just last week. Without debt, no 100k. But debt needs balance. Which mean that you need to keep in a good balance in order to be able to live with debt. To understand all this, let’s take a look at my budget, including all minimum payment that need to be made each month (this budget being valid for the period of September 2010-January 2011):

Monthly rent: 545$ (all included)
Internet: 38$
Student loan: 98$
RSP credit line: 108$
Credit line: 100$
Other credit line: 61$
TD Visa: 50$
Banking fees: 6$

TOTAL of minimum: 1 006$

+ 250$ on groceries

= 1 256$

This bring the minimum of the minimum needed at 1 256$. I don’t have cable, cell phone or any fancy things. Having 1 256$ as expenses to deal with each month is not that much. I can handle this by working part-time at my day-time job only. This means that each month, I have more than needed to cover the minimum expenses. I know that each month I earn more than 1 256$. That’s why I can currently handle the level of debt I have – but I shouldn’t be looking for more.

At this point, I am actually looking forward to decrease the amount of debt I have. I am can in a in-between I need to pay off debt and what about my new CGL investment kind of deal but life is like that. I could make that investment next week if I want. In this case, it's just a matter of what I really want.

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