I always find it interesting when I discuss using debt. It’s a subject most of us are very passionate about. Some such as Adam Baker (from the wonderful ManVsDebt) really believe in an elimination of debt while others like my M35 partner believe in using leverage. I personally find somewhere between those 2 point of views. I thought I would discuss my point of view today to get your opinion but also because it obviously has a major impact on most of our retirements.
-Debt/Credit should be built in order to build assets
-Debt/Credit should never become a source of stress
While I often disagree with my partner Mike about using extra leverage, that is mostly because I currently stand at a level that I am comfortable with both personally and in my online company.
-Big Purchases at 0% or very low rates: When buying furniture or a car, I’m usually more than happy to pay cash, at the time of the purcahse. That being said, if I get offered to pay over 24 months or longer, at a 0% interest rate, I’m more than happy to take it. It’s not worth it for a small purchase but for a bigger one, I can simply create an account where I put the money, earn interest and pay every month out of that account. Over time, it adds up. Why not take the opportunity?
-Mortgage: Here I have no other excuse than the fact that I do not have enough funds to pay back my house right away. That being said, my house is one thing I do not wish to leverage further. I’ll be more than happy to pay it back over time rather than pay only the interest as some do.
If I have $100 and borrow $20, a decline a 30% in the markets could make my investment worth 70% of $120- 20$ (that I owe) so $54.
Let’s imagine someone that used a 50% borrowing ratio, they would be left with:
70% of $150 – $50 that I owe is $64.
Multiply that impact over a big portfolio and it becomes very significant. Of course the opposite is true in a rising market. A rise of 30% would bring:
$145 for the highly leveraged portfolio
$136 for the lesser leveraged one
Clearly, I think every single person has a different risk tolerance, but I would love to hear your thoughts. Do you use debt and credit in every day life and for investing? If so, in what ways and what challenges/risks do you encounter?
Three Critical Truths:
-Debt/Credit Should only be used if you can control yourself-Debt/Credit should be built in order to build assets
-Debt/Credit should never become a source of stress
While I often disagree with my partner Mike about using extra leverage, that is mostly because I currently stand at a level that I am comfortable with both personally and in my online company.
Ways I Currently Use Credit
-Credit Card: By far, the biggest use I make of credit is for almost all of my every day expenses. I buy bigger items like vacations but even the smaller things like milk and grocery with my credit card. Why? Credit card rewards and accountability. Buying through my credit card makes it very easy to see everything that I purchased in a month. The best advantage though is the 1.5% cash back that I get from my credit card. Over a year, it becomes very significant for me.-Big Purchases at 0% or very low rates: When buying furniture or a car, I’m usually more than happy to pay cash, at the time of the purcahse. That being said, if I get offered to pay over 24 months or longer, at a 0% interest rate, I’m more than happy to take it. It’s not worth it for a small purchase but for a bigger one, I can simply create an account where I put the money, earn interest and pay every month out of that account. Over time, it adds up. Why not take the opportunity?
-Mortgage: Here I have no other excuse than the fact that I do not have enough funds to pay back my house right away. That being said, my house is one thing I do not wish to leverage further. I’ll be more than happy to pay it back over time rather than pay only the interest as some do.
Ways I Do Not Currently Use Credit
-Investing: I do not currently use credit to invest in the markets or elsewhere….I do understand that it can bring good returns, especially over time, and I have discussed using debt to enhance a dividend portfolio in the past.Why Don’t I Use Debt For Investing?
It’s not because I don’t believe in it. It’s not because there isn’t cheap money available. Rather, it’s simply because I only believe in leveraging myself up to a certain degree. That ratio will certainly change over time but for now, let’s imagine that my ratio is 20%. So for every $100 that I have in the markets, I’m ready to borrow 20$. That would mean a decline in the markets would have a limited impact on the markets. Why?If I have $100 and borrow $20, a decline a 30% in the markets could make my investment worth 70% of $120- 20$ (that I owe) so $54.
Let’s imagine someone that used a 50% borrowing ratio, they would be left with:
70% of $150 – $50 that I owe is $64.
Multiply that impact over a big portfolio and it becomes very significant. Of course the opposite is true in a rising market. A rise of 30% would bring:
$145 for the highly leveraged portfolio
$136 for the lesser leveraged one
Clearly, I think every single person has a different risk tolerance, but I would love to hear your thoughts. Do you use debt and credit in every day life and for investing? If so, in what ways and what challenges/risks do you encounter?
