Sep 132014
 

We teach kids to not begin a sentence with the word “Because.” We tell them the smallest things in the universe are atoms and molecules. But when the kids grow older they learn about proper grammatical structures and subatomic particles and inevitably realize that the information they were taught as children were simply inaccurate :|. Popular financial advice like “Don’t carry a balance on your credit card,” can be misleading as well.

One favorable reason to carry credit debt is for investing purposes. Earlier this summer, my pal at Finance Journey updated his June net worth where he had multiple credit cards with a combined balance of $26,800.

Being $26,800 deep in credit card debt may sound like a bad situation to be in, but he was actually leveraging the promotional low interest rates on his credit cards to buy large cap, blue-chip companies that paid him more dividends than the interest he accumulated on his credit card loans.

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He’s an average, middle class guy but he’s managed to grow his investment portfolio to about $100,000 in just a couple of years thanks to his modest savings and credit card leverage. Even low risk government bonds will still yield a higher return than the cost of those special credit card rates. If we know for certain that our borrowing cost will be low for a set period of time, and higher returns can be made elsewhere, then we can use the opportunity to make some extra money at virtually no risk ;)

Credit cards can also be used as a bridge loan, for example to cover the cost of buying a new car before selling the old one. It’s a way to use other people’s money at no cost to us. Many people including myself also use credit cards as emergency funds :D When I received a promotional 1.9% balance transfer last year, I did not hesitate to carry a $5,000 balance for many months. My credit card loan became part of the money used for a down payment.

Simplified financial advice is designed to connect with the most number of people so it tends to be generalized. Believing credit card debt is inherently bad is like believing humans evolved from apes. It’s just a convenient lie we tell kids because their brains are not developed enough to comprehend the real truth. But we’re not kids anymore. We must look at credit cards objectively and make decisions based on facts, and not on stereotypes.

We shouldn’t borrow money just for the sake of having debt, but in some circumstances carrying a controlled amount of credit card debt can be our best option to financial freedom :) At the end of the day what really matters are results. Crunch the numbers and do whatever makes sense to you.

Random Useless Fact:
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Both humans and apes evolved from a common ancestor that lived 5 to 8 million years ago. Given the right conditions, a modern ape species might evolve into something like a human, but it would take millions of years.

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Aug 202014
 

I came across a story recently about a couple who moved from Colorado to California. Their incomes doubled and within two years they became debt free :) The article starts off as follows.

This couple dropped $185K+ of debt in 20 months – Here’s how!
What do too many student loans, a mortgage, and a few bad money decisions equal? A debt upwards of $185K. This couple destroyed that debt in twenty months through budgeting, scrimping, and a handy book about personal finance…

Wow, good for them :) Can you imagine paying down on average $9,250 of your debt every month? That’s amazing! This couple must have sacrificed a lot and lived like paupers to reach debt freedom so quickly.

However what the article introduction doesn’t reveal is that most of their $185,000 debt was in the form of a mortgage, and they sold their house and paid back that mortgage within the 20 month period :P I tweeted my findings and received some funny replies from the Twitterverse :D

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Sarcasm aside, this is why it’s important to look at changes to overall net worth and not just the debt or assets as individual parts. So here are a few lessons we can learn from this story.

  • Don’t judge an article by its title. If something seems too good to be true it probably is. According to last year’s poll, virtually every visitor to Freedom 35 Blog has a positive net worth. This means anyone reading this who currently has debt can literally pay it all off and be completely debt free if they wish. All they have to do is sell your assets.
  • Debt is not a major financial worry if you have a positive net worth. If debt was really stressing you out, you would have sold your assets and paid back all your loans a long time ago. The fact that most people, including myself, have outstanding debts despite having a positive net worth, is evidence that we care more about having our material stuffs than living a debt free lifestyle :D
  • The amount of debt someone has is irrelevant in and of itself. For example, having $40,000 of student loan debt and no financial assets is worse than having $400,000 of debt, but also having an equal amount of assets.

Whenever I hear stories about someone paying off a large amount of debt within a short period of time I always take it with a grain of salt ;)

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Random Useless Fact:
How to recycle used underwear. #frugal to the extreme. #swag

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Aug 112014
 

I have been battling a financial addiction since 2008. It has unfortunately gotten worse every year :| I just kept going back for more, and couldn’t help myself. The potential harm of this long term abuse came up in a discussion recently when a friend in Toronto asked me what would happen if I lost my job :? So I decided it was time to do something about it and take control of my situation.

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The first step is to admit that I have a problem. So yes, I was powerless over my habit and my life had become unnecessarily complicated. But I can change. So today I have made the difficult decision to stop taking on new debt cold turkey, for the rest of the year :shock: This means I will only make new investments when I actually have cash on hand. Stephanie would be proud ;) From now until January 1st, 2015 I will not write any more of those obnoxious posts along the lines of “OMG! Best opportunity evar! Borrowed $10,000 to buy new investment. LMAO. Gonna be rich! #Sweg!” As for my existing debts which sits at only $535,000, which includes a mortgage, lines of credit, consumer debts, and long term loans, I will continue to service those debts and make the minimum payments. I only pay about $1,500 a month on interest so it’s no big deal given I make about twice as much from my job ;)

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Jul 292014
 

Last year I blogged about wanting to invest in bonds as one of my goals because I’ve heard smart people invest in stocks, but smarter people invest in bonds ;) Then earlier this month I wrote about taking out a loan and have dedicated some money to buy bonds with.

Well I have finally taken the plunge into bonds. Yesterday morning I purchased $5,000 face value of the Sherritt International Corporation 8% bonds, maturing on Nov 15, 2018, for the price of $104.475. I will explain the jargon in a moment, but essentially what this means is I have made an investment of roughly $5,200. And by the end of 2018 that investment will turn into $6,800. That represents a 6.8% annual return :D It’s not the best investment ever, but it sure beats the low returns on 5-year CDs and GICs.

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Bonds are generally safer investments than stocks because if a business goes bankrupt bond holders have priority over shareholders :P muahaha. I’m not 100% sure on this so maybe Chuck the bond trader can weigh in, but I assume this means my 6.8% bond return is pretty much guaranteed as long as Sherritt stays in business until my bonds mature. Considering how the company’s stock is part of the S&P/TSX Composite index and it hasn’t missed a quarterly dividend payment in almost a decade, I think my 6.8% return is pretty safe :)

I will discuss three topics in today’s post: Why I’ve decided to buy these bonds. How to buy bonds. And what are the risks and expected returns of my new bonds.

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Jun 202014
 

All the money in your bank account right now was created from debt in one form or another.

philosoraptor.money_The government creates money by issuing debt (bonds.) It then pays this money to public service employees, and the money eventually gets spent into the economy. The money from private sector jobs comes from debt as well. Small businesses often go into debt (business loans or re-mortgaged homes) to start up a company so they can pay their workers. More established companies pay their employees with revenue from selling products or services :) But in order to have sales in the first place, they need customers. And most consumers spend money by either using debt (credit cards, and other consumer debt) or by using cash from their wages, which as explained earlier, eventually leads back to a source of more debt. When people sell their homes, usually most of the money would be paid by using debt (mortgage.)

 

Whenever people get a loan from a bank, such as a mortgage, the overall money supply in the country grows, which translates into more economic growth. But that also means more people will be in debt. Even central banks acknowledge this to be true.

whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money.

~Bank of England

That “deposit,” is just a digital balance that appears in one’s bank account. It can be withdrawn as cash and spent. But the debt will remain until the money is paid back. We can’t introduce new money into the economy without also creating the same amount of debt. Similarly every time someone pays back a loan, money is destroyed along with that debt.

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