Apr 182016
 

“The more debt I have the richer I get” 

It’s easy for the Irish to build wealth, because their capital is always Dublin. 😆 But the rest of us have to find others ways to grow our net worth. I recently listened to an episode of Palisade Radio, where the host, Collin Kettell, interviewed Robert Kiyosaki, an American investor and the author behind the Rich Dad Poor Dad book series. According to Robert, one way to build wealth is by using debt. Here’s a part of the interview.

“People think I am a real estate guy, but I am not. Really, I am a debt and taxes guy. You see, the more debt I have the richer I get, and the more debt I have the less taxes I pay…. The 1% does not pay tax. They are also deeply in debt, but it is good debt – debt that makes them rich.” ~ Robert K

I currently have $490,000 of debt. If Robert K. is correct then maybe I should borrow even more money so I can become financially independent sooner, haha. But in all seriousness he does bring up some interesting points. Borrowing money allows us to invest more than what we currently have in savings. This magnifies the returns or losses of our investments depending on how they perform. He also suggests that having more debt leads to lower taxes. This can also be true. For example if we buy a rental property with a 20% down payment then the interest we pay on the mortgage debt can be deducted from our salary which will lower our taxable income, which means we pay less tax. 🙂

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Robert is also not a fan of the 401(k), which is similar to the company matching RRSP program in Canada. He believes it’s basically another kind of tax. For example an American worker may put $100 into a 401(k) and their employer will supposedly “give” them another $100 for free. But Robert argues that this reasoning is bullocks because it’s suppose to be the worker’s $200 in the first place because it’s part of the cost to keep someone hired. “The company isn’t doing you any favors,” he claims.

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Dec 102015
 

The Advantages of Inflation

Today I want to share one of my biggest secrets to success. I will explain how I generate $5,000 of value a year in passive wealth creation using my mortgage and other loans. It’s automatic, hassle free, hidden from my friends and the government, and is completely legitimate. 🙂

The Destroyer of Credit

Everyone knows that inflation drives up the cost of living and lowers the value of money. Thanks to inflation you don’t even need to have expired bread for your dough to be worthless. 😆 But here’s what some people may not know about inflation. Since money is so closely tied to debt, when our money loses value via inflation, so does our debt. 😀

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Think about it this way. Let’s say we owe the bank $100. After a year, if we haven’t touched the principal, then our $100 balance owed will have less purchasing power, assuming a positive inflation rate. Since $100 will be worth less in the future than today, our debt balance will become easier and easier to pay off as time goes on. 🙂

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Nov 092015
 

How to distinguish between good debt and bad debt

It depends on the definitions of good and bad, but in personal finance I believe good debt is generally any debt that we use in order to make a profit. The profit doesn’t have to come in the form of money or financial benefits. Borrowing money to attend school, for example, can be profitable for our minds and personal development, because learning tends to make us smarter. 🙂

If we don’t have a lot of savings but are out drinking with some friends anyway then paying with a credit card would be a good use of debt. Using credit is better than asking a friend to pay for our drink, and there’s usually an interest-free grace period on credit card purchases. Even if we decide to maintain a balance on our credit card and end up paying 100% interest over time before finally paying off the balance completely, it would still be debt well used. Surely drinking with friends is a pleasant experience. Otherwise we wouldn’t have done it. So therefore we still profit from the situation by having a good time. If you ask me, friendship is worth more than the cost of one night out, even if we factor in the interest.

Some people avoid using debt because they don’t understand how it can help them be profitable. Being in the dark about how to use debt properly can be costly in the long run. But the best way to remove doubt and risk is through knowledge. Once we learn the ins and outs of how an economic system functions, the uncertainties and unknowns that we once faced will fade away.

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Bad debt, to me, would be going into debt without the reasonable expectation to profit from it. 😕 But I can’t think of any situation where someone in their right mind would ever do that, lol.

I actually don’t know of anyone in my personal life that has actually taken on bad debt. Everyone I know who used debt did it for the right reasons at the time. I believe every kind of personal debt can be good debt. 😀 Student loans is an investment in higher education. Credit cards offer instant gratification which adds immediate value to the present, while delaying the payment until later. A car loan can dramatically improve one’s commuting experience.

Obviously debt can be abused or mismanaged. But for the most part people appear to use debt in order to improve the quality of their lives. For better or for worse we live in a society that revolves around debt. Those who don’t learn to control their debts are doomed to be controlled by their debts 😉

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Random Useless Fact:
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Oct 132015
 

Debt is Freedom

I once read in a book, “the borrower is slave to the lender” Proverb 22:7. But I don’t see it that way. I think debt is simply a loan between a borrower and a lender which usually involves a contract to pay back the loan over time. Nobody is a slave to anyone in this voluntary transaction. If I have a car loan and continue to make my payments on time, then the lender can’t tell me what to do with my life. It can even be said that I’m less of a slave now because I’ve gained more personal freedom by having a reliable vehicle, which wouldn’t have been possible without going into debt in the first place. 🙂 So hooray for convenient transportation. I’d like to give a big shout out to my car, for giving me the drive I needed to succeed. 😆

Illusion of Debt

It’s often assumed that more debt is bad and leads to more financial risk. But debt is a funny concept. Japan has a debt to GDP ratio of 230%. This means Japan owes 2.3 times more than its annual economic output. Holy frankfurter! 😯 On the other hand, Canada’s debt to GDP ratio is a much more manageable 86%. Naturally we would expect Canada to be in a better financial position to take on additional debt. However, as of this post global lenders are demanding 5 times higher interest rate when Canada borrows money than when Japan does. (Sources: Japan gov’t 10Y Yield,  Canadian gov’t 10Y yield.)

Part of this disconnect between risk vs return is due to central bank manipulation. But debt itself is not always what it seems. Consider the following comic strip I found on the internet awhile ago.

The illusion of debt in Greece and Europe

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Jul 282015
 

Insolvencies by Age and Province

A lot of money is tainted. It taint yours, and it taint mine. 😀 That’s why it’s important to make the most of the money we do have and spend it responsibly. But sometimes if we don’t have enough money to buy what we want, we’ll need to use debt.

There’s nothing inherently wrong about borrowing money, but we have to be careful to not overextend ourselves. When we are no longer able to service our debt payments we are considered to be insolvent. The insolvency rate for Canadian consumers is only 4.2% and has been steadily declining since 2010. Here’s an interesting chart via the Government of Canada showing the distribution of insolvency by age groups.

15-07-consumer-debt-by-age-Insolvencies by Age and Location

According to the graph adults between 25 to 29 years old such as myself only represent 7.1% of all insolvency cases. This is lower than most other age groups. On the other hand, Canadians between the ages of 40 and 44 are most likely to become insolvent.

Younger adults are generally still building up their financial stories. It’s easier for younger workers to change careers. And they’re also more likely to live with their parents. Meanwhile, middle-aged folks have fewer financial options. It appears after we turn 40 we’re likely busy raising families. Salary increases are not as generous as earlier in our careers. And some of us will need to start taking care of our aging parents. This sounds like the worst time to be worrying about debt problems, yet the evidence shows this is exactly when we’re most likely to struggle staying solvent.

How can we prepare for this mid-life financial risk?

Allow me to present a brief case about debt and age groups. 😀

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