May 222017

Some people are so debt averse they even refuse to borrow money when interest rates are at rock bottom. They save up for a 30% down payment for a home instead of 20% because they want to save on interest costs. This is despite the fact that Canadian mortgages only cost about 2.5% currently, or sometimes lower like in my case. These people also refuse to invest on margin. I’ve explained in the past how anyone with at least $10,000 can open an account with Interactive Brokers, put in some money, and safely borrow modest amounts of money at just 2% interest rate, with practically no risk of getting a margin call.

Can’t have it both ways

Yet, many people who are debt averse and won’t borrow money under any circumstances also believe in the 4% rule of investing. But this kind of thinking is contradictory. It’s silly to make the argument that paying down their mortgage is a guaranteed rate of return, but investing is uncertain and they can’t be sure they’ll make more than 2.5% return in the markets. While at the same time, also claim that the 4% rule is valid.

The four percent rule is a widely accepted rule of thumb used by many investors and financial experts. There are slightly varying definitions of it, but for the purpose of today’s post we’ll define it as the maximum sustainable rate of withdrawal from a retirement account each year without depleting the account itself. This is because 4% is considered a “safe” rate of withdrawal over the long run for a balanced and diversified portfolio.

So if a person really believes in the 4% rule and uses it as part of his retirement planning, then it would only be rational to consider borrowing money to invest if the cost to borrow is lower. The 4% rule says that this person will make at least 4% return on his investments per year on average. So if he always borrow money at less than 4%, then he is virtually guaranteed to profit in the long run! assuming the 4% rule holds true.

This is why I always buy properties using very low down payments, and use controlled margin borrowing to invest. Since I believe in the 4% rule, it would be illogical if I didn’t try to take advantage of low interest rates. If my margin or mortgage interest rate were to increase to 5% or 6% some day, then of course I would no longer take out new loans to invest. At that point it wouldn’t make sense to use leverage anymore. Sometimes it may seem like being debt free is more safe. But there is risk in being overly debt averse, the risk of not seeing perfectly good opportunities to earn higher investment returns.

Obviously just because a rule has held up in the past doesn’t mean it will continue to hold true in the future. Whether or not you think the 4% rule is valid is up to you. 🙂 But this principal can work with any other withdrawal rate. If you believe you can safely and sustainably withdrawal 3% a year, then you must also accept that your portfolio will return 3% a year minimum on average. You can then use this number as your reference point when deciding when to use leverage and how much.


Random Useless Fact:

Some grocery stores have an aisle dedicated to strong, independent women. 😄


Oct 202016

Debt Isn’t Bad

Private debt was invented to facilitate convenience in trade. This principle was widely accepted for most of human history. But things have changed in the 21st century. Today, many generic debt bloggers will rant about how much they hate debt with a passion and want to pay off their debts ASAP. They seem to be very debt-icated to their cause. 😛 But why would they go into debt on purpose, and then become so upset about being in debt? 😠 Isn’t that exactly what they wanted?


We don’t borrow money and pay interest to a bank out of the kindness of our hearts. Instead, I believe most of us go into debt for one simple reason; to increase our own standards of living. We take on debt because we are motivated by self interest. 🙂

Would we go into $500 of debt to buy a football? Probably not, unless it’s one that’s autographed by Lionel Messi. 😉 But how about taking on $500 of debt to experience a 3 week, all-inclusive trip to the Great Barrier Reef? Heck yes, I sure would!

If our objective or desire is worth more to us than the cost of borrowing then using debt is preferable.

If it’s not worth the debt then we don’t borrow. The same can be said for practicing mindful spending. It’s really quite simple. 😀

Nobody can force consumers to use debt. It’s possible to go through life without using debt at all. But relying on savings alone to make every purchase means losing out on choices, and opportunities. By the time a saver accumulates enough cash to start college, all his friends who used student loan debt to get ahead would already be graduating. Why would anyone want to commit to a debt free life if it means depriving themselves of opportunities? This is why I concluded that I will probably never be debt free.

Of course it’s completely possible to have too much debt, just like it’s possible to overwork ourselves. But we should all learn from our mistakes and move on. Much like being mindful of our purchases, we should be mindful of where we should be on the debt spectrum.

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Sep 082016

The Debt Free Fallacy

The mainstream concept of debt creates unnecessary anxiety for people. Innocent consumers are made to believe that if they have $2,000 of credit card debt at 18% interest rate then that’s somehow a terrible thing and paying this off should be their first financial priority. But that’s a load of baloney, 😛 because we all know that paying for things like food is more important.

But let’s say they made some sacrifices to quickly pay off this $2,000 credit card balance. “What a big relief!” they tell themselves. “I’m finally debt free. It feels like a great weight has been lifted off my shoulders.”

But has it really? I’m all for celebrating financial achievements but let’s put things into perspective. That $2,000 of debt was only costing them $30 per month in interest. That’s less than 1% of most household budgets. It’s really just a drop in the bucket.

So yes they are debt free. But they don’t realize that they had to give up $2,000 of hard earned money in order to pay for their “debt free” privilege. That money could have been used for a wonderful vacation to Maui instead of paying back the loan. If they cut their internet or cell phone bills by $40 a month, then that would be more beneficial financially speaking than paying off their credit card balance.


What’s so great about being debt free anyway? Even after they pay off their $2,000 consumer debt they’re still on the hook for everything else in life. It’s not like the other 99% of household spending magically goes away because they no longer have any more debt payments. There would be almost no difference in how they live now compared to when they still owed $2,000. In fact, having reasonable amounts of debt is actually advantageous because it would help build their credit history.

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Dec 172014

Flawed and Unreliable

The debt to disposable income (DTI) ratio represents the ratio of one’s total debt amount to his after tax income. But the debt to income flaw is not often discussed.

Debt” is a balance sheet item (net worth,) but “income” deals with budgeting (income statement.) Debt is simply a static number, while income requires the element of time in order to exist. One has a set monetary value while the other is a reoccurring event. Comparing the ratio of debt to income is like comparing net worth to spending. Or, for the engineers out there, like comparing a scaler against a vector. The two variables that make up the ratio are loosely correlated at best, but it’s not a very relevant measurement for any practical purpose. 😐

The other problem with this ratio is it’s heavily influenced by monetary policy. 30 years ago the typical mortgage rate was 18%. The cost of carrying a loan was extremely expensive, almost prohibitive. Thus the debt to income ratio was under 80%, quite low. But today, the cost of servicing a mortgage is only around 3%, so more Canadians can easily afford to take on larger mortgages. This increases our overall debt levels which skews the DTI ratio. We consumers will naturally increase our borrowing if the cost of credit is cheaper. But that doesn’t necessarily mean we’re at greater risk of insolvency.

14-12-debt-to-income-not-useful-gun, debt to income ratio canada

This is why the debt to income ratio isn’t a very reliable metric to use over long periods of time. It’s impractical to compare debt and income to begin with. The added effects of changing interest rates only makes the wonky ratio even less valid. 🙁

Statistics Canada recently announced that our average household debt to disposable income ratio hit a record high of 162.6% in the third quarter, which has generated a lot of discussion in the media. But giving so much attention to this insignificant ratio is like rearranging the deck chairs on the Titanic. Don’t we have more important data to study?

Alternatives to the Debt to Income Ratio

What can we use instead of the debt to income ratio in Canada? I believe a much better metric to measure consumers’ financial situation is the debt to net worth ratio. Debt to net worth (or equity) ratio is what businesses use to determine if they are borrowing too much. They use this ratio to determine debt related goals for themselves. Total-debt-service (TDS) ratio is another helpful way to gauge our debt default risk because it measures how much we pay each month towards debt against how much money we make over the same period. Actually, the Americans often use the TDS ratio, but they refer to it as their “debt to income ratio.” If you’re confused this comment should help clear things up.

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Jul 052014

It’s not easy being an investor these days. We’re facing higher taxes. We’re being vilified by the media, and we often feel distanced from our friends and families because of our life choices. The struggles we face are real 😐 but our voices have not been heard. Below are several examples of first world investor’s problems.

The Crude Reality

During the last couple of weeks the price of crude oil (WTI) fell slightly. As I’ve disclosed before I own many oil companies like Suncor and Crescent Point Energy. These businesses make more money when the price of oil is higher. So sadly my stocks have been going sideways these last couple of weeks.

14-07-oilglass firs world problems

Of course no one else is complaining because gasoline prices at the pumps fell slightly in recent weeks. But the lower oil price is really hurting my potential profits. Crescent Point shares are only up 12% year to date, and Suncor is only up 22%. How will I ever get by on these dismal returns? 😛

Choosing Sides

Last month the Federal government conditionally approved the Enbridge Northern Gateway pipeline project. This is great news for Enbridge investors. But most of my co-workers and friends are upset about Ottawa’s decisions. They don’t think the pipeline should be built, and they represent the majority. According to some sources, 80% of B.C. residents are opposed to this project.


So now I’m torn. I care about the environment as much as my friends do, but I also want my investments to do well. I can’t talk to anyone about this because I haven’t told my friends that I’m an Enbridge shareholder. I don’t want to risk the political backlash. I just avoid conversations if this topic comes up. And I have to make up excuses to not join my pals in anti-pipeline protests, which looks like fun. Being an investor really puts a damper on my social life, and I have to miss out on fun activities with my friends because otherwise I’d feel like a hypocrite 🙁

Exploiting Your Friends

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