Do you have debt? Whether it’s $5,000 in credit card debt, $30,000 in student loans, or a $100,000 mortgage, debt can be stressful for many people. Well here are some things you can tell yourself to feel better about your debt 🙂
1) I’m in my mid twenties and I have over $230,000 of debt which includes a hefty mortgage, $7,000 RRSP loan, and more than $20,000 in a margin trading account. I used to have over $10,000 of student loans as well, but paid that off early since it had a relatively high interest rate. I have plans to increase my total debt owing to over $300,000 by the end of this year after I secure a loan to buy a piece of property I was looking at. If someone like me with an average salary can go this deep into debt and still sleep like a baby at night, then you probably have nothing to worry about (^_~)
2) Debt is a depreciating liability. You know how you can stash away $100 under your bed, and by next year it’s only worth $98? What happened to the $2? Inflation happened right? The rising cost of living can be a pain, but it can also be a gift to people who have debt. If you owe the bank $100 for example, then by next year if you haven’t touched the principle, that $100 balance you owe will only have $98 of purchasing power which means it’s EASIER for you to pay it back. So my $230,000 debt, assuming a 2% inflation rate, will only be worth $225,400 by next year. Wow, I just increased my net worth in REAL terms by $4,600 without even paying back any principle :0) Thank you inflation! Take that TD Bank! lol. The US has over $16 trillion of national debt. And its growing by billions of dollars every day because their government continues to spend more than they take in. Actually our Harper government is not doing that much better (>_<) But anyone who can do simple math understands this trend can’t continue forever.. or can it? Mr. Bernanke, the person in charge of monetary policy in the US explains-
3) Interest rates are low. If you see a potentially lucrative investment opportunity whether it’s to give yourself more education, renovate the home, or start a retirement plan, then going into debt to fund these things to make your life better is okay (^_^) Don’t feel bad about taking advantage of easy credit. For example, if you’ve always wanted to buy a caravan and drive around the country, Positive Lending Solutions has options for people with poorer credit so you can still do something educational and fun.
4) Ben Bernanke still has a mortgage despite having millions of dollars in liquid financial assets. Mr. Bernanke bought his house on Capital Hill in 2004. Today his home has appreciated in value by $126,468, and the stock market has gone up by nearly 100%. This means by continuously borrowing money from the bank he has been able to free up his own savings to get a better return on his capital.
At the end of the day, just remember that DEBT is only as bad as we think it to be. Nobody appears to be losing their hair over our public debt in Canada, which sits at about $32,000 per person. However when we take on a $10,000 car loan it can become this daunting burden, and we stress over how to pay it off ASAP. But if anything, I think public debts like the ones held by CMHC, and our Provincial debts (AKA Ontario’s) should be a bigger concern to the quality of our and our children’s lives in the future. You can pretty much rationalize debt any way you want. It can be scary, or it can be no big deal. Sometimes it’s just all in our heads (＠_＠;) I’m just trying to say nobody likes to have debt, but if you do, don’t worry. As long as you have a plan to deal with it, there’s no reason to let it get you down. Just relax and enjoy life 😀
Debt only works if you have a low risk plan to cover it, for something you just have to have, which you could otherwise not afford. It is a cost vs. time risk. It really depends on a few factors though whether debt can work for you. Key still is, that you must spend less than you have coming in inflow/outflow. That means as long as your income is increasing, you can increase your debt load. Life is about balance. All I’m saying is, at a young age, debt can be an effective way to get ahead as your human capital grows, but as we age one must start to pay attention to that cost vs. time risk and rebalance that outflow/inflow balance to ensure debt does not become us (@_@).
Heh, I like the face. It’s interesting how much of a complex topic this 4 letter word, that basically means borrowing money, can be. I agree that age plays a big role in determining our outlook for debt. It is much less tragic to make mistakes and fail at levering at my age than doing it when I’m 65 years old. Everyone should definitely re-evaluate their risk tolerance as time goes on. Even planning to start a family can mean paying down the mortgage faster to make it easier to finance the remaining balance when the baby comes.
I am not entirely sure I agree with what you’ve written…. but I see your point. Couple of things I’d like to point out: 1. Inflation is nice to think about in terms of consoling yourself that your net worth is increasing, but that means your investments are also worth less as time goes on, so if you aren’t clearing the principal or saving absolute dollars, it’s kind of a wash. 2. The US problem is not going to be solved by the magic of inflation. Again, nice sentiment, but what I see as the main problem with the government (as with regular consumers), is that you STILL owe the money and eventually you DO have to pay it back. The trick (and the hardest part for anyone), is getting into that mindset and having that ability to sock away money and save when you aren’t used to saving or cutting back. 3. A plan is definitely the key to getting out of debt, but sometimes you can’t relax and enjoy life. Sometimes is IS a big deal and you HAVE to deal with it. Debt is not something you should accept as a part of life and growing up.… Read more »
Great analysis Mochi :0) Did you major in econ or something? I left out the details you’ve mentioned but you’re points are quite true. I think I’m just more inclined to take on debt than most people are 😀
Right. And to add to his point, this only works when inflation is higher than the interest charged on your debt ( which it is currently not)
I don’t know that I entirely agree with your argument, but I do see your points. Debt can be used as a great leverage to further yourself financially. I am not against using that leverage, but generally am averse to it. I want to be able to be independent of being obligated to owe money to others, which helps me sleep better at night.
I can see the benefits of being debt free too. And I bet it also makes managing your finances easier if you don’t have all those loans to worry about ^_^ The important thing is for people to understand all aspects of debt.
I’m not sure I 100% get what you’re saying. One of the things I’ve always seen with something like a mortgage is that the relative cost will go down over time as you get raises and such. So the $1,000 payment today will stay $1,000, but someone who goes to buy the same home in ten years might pay $1,200 per month due to the higher cost of that home. I’m not sure if that’s what you’re saying but thought I’d throw it in there anyways.
That’s pretty much it 🙂 When people get a mortgage they sometimes think it’s this large monthly payment that’s going to eat up a good portion of their income for the next 25 years. But in reality, it gets easier over time. When food, gas, hydro, and everything else becomes more expensive in the future, the mortgage payment will remain the same meaning it takes up relatively less of their expenses. Plus, like you mentioned, wage inflation also helps. People in Vancouver, for example, who bought homes in the 90s with mortgage payments of $500 thought housing was expensive, and it WAS costly at the time, probably representing 30% of their expenses. But today, relatively speaking their mortgage probably only takes up 15% of their expenses. This is why I also believe in home ownership because having an inflation protected asset while paying down the principle of a loan on it every month is one of the best ways to financial freedom, but that’s for another post :0)
leverage is something that makes you look really smart when things are doing well, but really dumb when things go south.
the thing i find funniest about debt is that people who are often in debt, are not the ones that should be taking on that much debt, but the people that have no debt, are the ones who can afford to take on more debt to build net worth faster.
debt is essentially a wealth transfer tool. it transfers wealth from financially inept to financially savvy. for example, someone who has credit card debt is basically giving up his wealth to bank/credit card investors. another example, someone who stashes savings away in savings account, GICs, bonds nowadays earning 1% are giving up their wealth to those who are borrowing to invest in real assets (stocks, real estate) at 2-3%, as well as bank investors (net interest margin)
It doesn’t matter if interest rates are high or low the banks always seem to find ways to make good money from their customers and their deposits. You’ve hit the nail on the head about debt being a wealth transfer tool. My net worth wouldn’t even be half of what it is today had I not used this tool in the past. But I understand it’s risky and maybe I just got lucky for the past 4 years. We live in a society where debt drives the economy so I plan to continue learning how to better use the debts I have to grow my asset base even more. Knowledge is power they say.
you’re absolutely right. banks dont care about absolute margin. they care about the shape of the interest rate curve. the steeper the curve between short dated and long dated rates, the more money they make (by taking in deposits at the short end rate, and loaning it out at the long end rate).
taking on a lot of debt is just the opposite extremity vs saving a lot in an interest bearing account. the two are equally foolish and reckless. as long as you manage your debt load and debt service ratio you should be fine. one caveat is when liquidity REALLY dries up, and creditors call in the loans, even the ppl/businesses that are able to continue to pay their debt may go under. it happened often in recessions in the past, and A LOT in 2008-2009.
I totally agree with your strategy there, but it is definitely not for anyone. Some people go too tight on the margin and it can be a stressful situation. You have to define the level of risk you are comfortable with and hope that your financial situation will be at least the same or better. If you lose your job and can’t make the payments you may have to cash out your stocks and lose money.
Yes, there’s always the possibility of running into unforeseen emergencies along the way. It’s too bad that usually it’s just when you need to cash out your stocks does the stock market become bearish. Understanding how much debt a person is comfortable taking on, and balancing that with the need for an emergency fund is what’s important. Different strokes for different folks.
Is there anyway for a student to use leverage?
I’ve got a full TFSA but can’t actually use leverage to invest since I don’t really have many assets and don’t really make any money.
I’m not sure of any good leverage tactics at the student level, except borrowing money via student loans for your tuition. A student loan is great a leveraging tool for anyone going to school because it lets you get enroll in better programs you may otherwise not have the money to take. You can basically use other people’s money, interest free (for the time you’re attending school,) to get a better education, which is one of the best investments you can make for yourself. Then after you start working, you can open up a margin account and start doing a little big of leveraging in there using stocks, to see if it’s right for you. I would only leverage in a TFSA if I’m relatively certain an investment will do well.
I like you put that, that your debt decreases through inflation. I’ve never thought about it like that!
You can wrap it or spin it however you like, but you are still paying someone to have their money. Do not think of debt as good or bad as the bankers and advisors want you to think of it – Remember they are in it to make money for themselves and ultimately the bank/shareholders. Teach yourself to think of it as paying someone for the privilege of borrowing their money… does it make you want to pay it faster now when worded that way? It should, unless of course the math works, as the only way debt works is through the numbers. Say I have $1M in an investment account making 7% annually, paying 35% tax rate, and I want to buy a new car – should I use my money to buy the car or would it make sense to grab the 1.9% financing option? Don’t think of debt as good, bad, positive or negative, just do the math and you two can be among the 1%. Take it from someone who managed to retire early in life.
@ Mo’
It’s all part of how interest rates and our sovereign debt work. What’s important for individuals is to build up a strong and diversified portfolio of inflation protected assets so our investments don’t decrease over time offsetting the benefit inflation has on our liabilities ^_^
@ Phil
That’s a good example. Some car companies even offer 0% financing. I suppose that’s why a recent study by TransUnion said Canadian’s non-mortgage debt is at an all time high, driven by vehicle loans lol. There’s no such thing as good or bad debt, there’s only the cost of capital.
I have a feeling the people that come to this country with nothing and become extremely wealthy are the ones who understand debt and how to leverage it to get what they want. I wish I had the knack for figuring this sort of stuff out. I know the opportunities are out there, I’m just oblivious to seeing them.
Our country prides itself with immigration and mixing new ideas from different cultures together to create wealth and a better life for everyone here. Often the barrier to making this happen is the risk involved with creating opportunities. A lot of small companies have to borrow money in order get themselves started or to grow. Many unfortunately go out of business within the first 5 years of operation. But for those who are successful the sky is the limit. Any large company that makes our lives better today (Google, Starbucks, Fed-Ex, AMD, Amazon, etc) probably once started out small and used leveraged (both financially and strategically with rare expertise) to expand to the size they are today. Regular folks like you and I can also take advantage of borrowing to make more money. But it’s hard to do sometimes once I start calculating all the risks involved.
I learned this after having some trouble dealing with my 38k debt. Even once I had a plan in place and started chipping away at it, I still had trouble handling the burden emotionally. I’m better with it now, I think I’ve come to terms with the fact that my debt isn’t going to go away any time soon.
Slow and steady wins the race. If we decided to take on debt then that means we probably did it for a reason. Coming to terms with the reality of having debt is important. It’s all about perspective.
I think it also depends on whether your debts were due to purchasing assets like real estate and stocks or whether They were due to consumer purchases like big screen TVs. I’d be a lot more worried about my debt if it was all due to store credit cards.
Glad you brought it up. What kind of debt one has is just as important as how much it is :0)
What CF said. Leveraging income-producing assets is much different that unsecured credit card debt.
I disagree. Debt is debt. Bottom line, regardless of what debt you have your balance sheet needs to be in order. Yes it is true that if money is working for you, you have a better chance of having a nice balance sheet, long term, but I know many who have over extended themselves trying to leverage income producing assests… Take on only that which you can afford, for your current lifestyle, and not the lifestyle you’d think or would like to have. This is the way to unlocking a lifetime of riches.
Balancing the books is key, because at the end of the day, debt is debt :). It’s not loyal to any person or place. I also don’t believe in good debt or bad debt. Credit cards can be a useful lifeline sometimes. For example if I had to put $8,000 on my credit card, because I couldn’t reach a financing deal in time for the possession date on a lot I’m purchasing, then I would gladly pay the $8,000 with my credit card. Even if my interest rate was 19%, if I know I can pay it off within 6 months or so, then it’s better to use my card to pay the balance than lose my $2,000 deposit which I’ve already paid >_< It's about the cost of capital and how we use debt in our lives that counts. There were many who lost their shirts in the last recession because they were over leveraged. I hope that won't happen to me in the future but you never know. So although I plan to use debt as a tool, I plan to be careful and flexible with it.
@101 Centavos
Good thing most of my debt is used to leverage assets then. Since different debts have different costs and benefits, each debt should be analysed on its own terms. There’s always a story behind the numbers and depending on how that debt is being used it could mean different things. I’ll write about different types of debt in another post but I’d rather owe $1000 on an investment loan at 4%, which is also tax deductible, than owe $1000 of credit card debt at 19% interest rate.
Donno mate. $230,000 is not a lot of debt considering your income and the inclusion of your mortgage!
I love real estate and think the ideal mortgage amount is $1 million, if you can afford it!
Best, Sam
I plan to have a million dollars of mortgage one day. I know, $230K is not a lot of debt. Authorities keep telling us that our debt to income ratio is too high but they don’t look at the bigger picture that North Americans now have more assets than they did before.