The basic concept of debt is simple. It’s when someone borrows money from another person. But once we start looking at different forms of debt such as sovereign debt, treasury bonds, mortgage-backed securities, demand loans, etc, it can start to sound like a different language to many of us. 😕
Even the money in your wallet right now is just another form of debt. It may not be your debt but if you trace back that money to its initial point of creation you’d discover who’s debt it belongs to. 😉
Year of the Debt
It has come to my attention that there is a lot of misinformation and confusion about the topic of debt on the internet. That’s why I’m making the proclamation that 2015 will be the year of the debt. I dedicate this year to write more about debt and its impact on our lives. I have even created a new section on the blog that’s all about debt.
Most consumers are told that being in debt will hold them back from spending, investing, and living the life they want. But this is not entirely true.
Canadians now have more debt than ever before yet our average household net worth continues to reach record highs. So debt and wealth doesn’t have to be contradictory. In fact, often times debt can increase our financial well-being.Alberta has the highest household debt of any province, but they also have the highest household incomes. 🙂
Last year the Government of Canada issued $1.5 Billion of debt in the form of a 50 year bond. The Finance Minister says they are continuing to deliver on their “commitment to reduce refinancing risk and lock in low-cost funding for Canadian taxpayers.”
Investor and entrepreneur Kevin O’Leary from Dragons’ Den publicly announced that most of his personal portfolio is invested in debt securities. The man is in his early 60s and he loves debt! Only a portion of his own money is in the stock markets.
The Debt Market
Debt can be traded between investors just like stocks. In fact, the debt market is much larger than the stock market. Small time investors often talk about buying stocks, but the millionaires and billionaires usually trade debts. Data from the bond and treasury markets help set monetary policies. And private banks like Wells Fargo and Royal Bank calculate their mortgage rates based on corporate debt yields. In other words, the public debt market is what really determines our mortgage interest rates, not the government or central banks.
Local communities use debt all the time to buy services and programs they can’t afford, but still want. Susan Myers, a city councillor from Sault Ste. Marie, Ontario states that “cities without debt and poor infrastructure are worse off than cities with debt and good infrastructure. We will always have debt if we are going to continue to improve facilities.”
In its 2012 budget, Mississauga, ON used debt for the first time to fund city projects. It borrowed $21 million to retrofit street lights with more energy efficient LEDs which will result in long-term savings based on reduced electricity and maintenance costs, with full payback expected in 6 years.
South of the border, the largest wireless operator in the country borrowed $49 Billion in 2013, the most debt ever issued to a company. American oil and gas companies have also ventured deeper into debt in recent years, increasing their borrowings by 55% since 2010, to almost $200 billion today. 😯
Not just a four letter word
So join me this year as we dive into the fascinating world of debt and explore all its secrets. 😀
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Random Useless Fact:
Hey Liquid, I like that you’ve proclaimed 2015 as the “Year of Debt”! You make some interesting points about how the elites in our society use debt to their advantage by buying appreciating or income producing assets. The problem for the other 99% seems to be that they tend to use debt to finance depreciating assets like vehicles etc.
Excellent observation. 🙂 I think this is solid empirical evidence that financial success comes from an individual’s actions, habits, and perception of reality. If we want to be rich we simply have to take the necessary steps to become rich. Anyone can save money. But whether they spend that money over time on luxury or financial security is their choice. It’s a shame many people choose the former, and then complain about how life is unfair without realizing what others had to sacrifice to achieve financial freedom. It’s all about personal choice. :0)
To add to your interesting factoid about the world debt markets being larger than the world equity markets:
I read once somewhere that Common Law structured countries have a significant proportion more equity markets (vs. debt markets) than Civil Law structured countries. Example: England vs. France
Thanks for the great bit of trivia, JR 🙂 I wonder how both debt and equity markets hold up against the global foreign exchange market.
Whats your long term plan with debt? Do you always plan to cary some a long as you can make a higher return with some?
My long term plan is to see how interest rates change over time and adapt accordingly.
If it costs me 3% on average to service all my debts then I want to be at a debt to equity ratio of 200%. If my debt costs me 6% on average then I will limit my debt usage so that my debt to equity ratio is 20% or less. 🙂
Everything else will be within those two extremes.
Right now my average interest rate is 3.6% across all my debts and my debt to income ratio is 160%.
Running a HELOC for investment purposes @ 3% interest. So the interest is tax dedcutible but my gains are taxable. I haven’t bothered to figure out exactly how much i am making, but as long as the divs cover the interest AND pay down some of the principle I am happy. Also the principle has to be more than the loan. Kind of obvious if you are covering the interest and some principle with the divs. As long as the interest is covered and the principle is being reduced I won’t complain. Hoping for low interest rates for as long as possible to lower that HELOC.
Approx $3K interest last year, approx $14K divs. So Imade approx $11K taxable which paid down the HELOC
Great idea. Eventually your HELOC will be reduced to nothing and you’ll be left with a large dividend generating portfolio. 🙂 The other nice thing about this type of strategy is the interest charged for the HELOC loan is tax deductible at your marginal rate, while the dividend income from the investment portfolio is taxed at a lower, more favorable rate.
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