July 31, 2007, 6:00 am

How Much Should You Leverage?

by: The Financial Blogger    Category: Leveraging Strategies

Before reading this post, you should turn your eyes a little bit further on the right and have your mouse pointer follow. Then, you will notice a big orange button… CLICK ON IT! If my “persuasion technique” does not work on you, well please just sign up for this blog RSS Feed by clicking on that orange button;-) Then, you’ll get my daily post in your email everyday!

Another great Carnival at Plonkee Money this week. Many fellow Canadian Bloggers are featured : Milliondollarjourney, Four Pillars and Financial Security Quest. Check it out! 

I had the idea of this post after a comment left on my blog from financialjungle.com on the article about The Double Dip strategy ( I know I was supposed to post the Double Dip Part2 a week ago, but I had problem posting the calculation chart. I should do it shortly). As you probably noticed by now, I usually use 100K for my calculation on hypothetical investment loan when debating about leverage strategies. Financial Jungle was suggesting that 100K might be too much for leverage. My answer to this is; it depends (haha! Speaking of a typical banker’s answer!). Seriously, I think that the question about leveraging is not if you should do it or not but how much should you leverage?

As I was explaining in my answer to Financial Jungle, there are two major factors to be considered when you are talking about leverage loan. The first one is your available cash flow. Investment loans are a good tool to apply the “pay yourself first” strategy. As you are actually contracting a real loan, you have no other choice but to make the minimum requested payment at the end of each month. As leveraging strategies are built on a long term investment horizon, you must ensure that you will be able to cover the monthly payment. You have to take in consideration your actual budget plus the possibility of interest rate going up. Hopefully, interest rate will not climb to the Everest Mount soon, but might sit at 7-8% for a while. Prime rate in Canada is already at 6,25% and might increase by another 25 points by the end of this year. Always make your projected calculation with a higher interest rate. You will have enough cash flow to pay the interest only and therefore, will not be forced to cash in your investment to pay it off during a bear market.Another trick is to already make an extra payment. If you can afford to pay $300 in a leverage strategy, take a loan that requires a minimum payment of $250. Therefore, you will cover the interest and pay a little part of the amount borrowed. Your deductible interest will not be affected too much (7% of $600 is $42) and it will give you the opportunity to build a safety net if interest rate goes up.The second factor to take in consideration is your net worth. Most financial planners, investment companies and other financial institutions will recommend borrowing up to half of your net worth. The calculation of your net worth is important as it could determine how much you should borrow. Please note that I do not recommend including car, furniture or other goods in your net worth calculation. Use your bank accounts, registered and non registered investment in addition to the market value of your property (stay conservative). The reason behind this rule is to determine if you can still live after seeing your investments going to the grave while you are still owing money. Even if it is unlikely to happen, there is always a possibility that markets fall into a big coma and never wake up. This possibility needs to be considered while you are doing your financial plan.In the end, leverage is for everybody. Using leverage for investments is accelerating the improvement of your financial situation. People will not convince me that you will lose money on the market over 20 years. If you really want to play safe, buy an index fund related to a specific market and wait 20 years. You will average about 7-8% and therefore, make money out of your leverage loan.

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July 30, 2007, 6:00 am

The Way Banks Look at You Part 5: Would You Lend Your Own Money to This Guy?

by: The Financial Blogger    Category: Banks and You

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Why banks are so stupid that they will not lend more than 25K without a strong co-applicant or security? Why would they say that your request is too risky for them? They are making hundreds million dollars of profit; they surely can lend 40K to pay off your debts. What is their problem? As being a banker and also a client at the same time, I can empathize with your frustration. Continuing this series about how banks look at you, I will try to explain the reasoning behind an unsecured declined file.

 

Imagine that you are all alone by yourself, working hard and you accumulated $30,000 in your savings account. It took 7-8 maybe 10 years to grow your saving where it is at now. However, as you do not need this money at the moment, it is gently making 4,25% in an ING account.

 

You have several friends that are not in the same situation. They are not as responsible as you are and get randomly into financial troubles because they can not save money on a regular basis. They sometimes pay their bills late, forget about them for 2, 3 months or call their landlord to tell them that they will pay their rent on the 15th instead of the 1st. Regardless, they always end up paying their bills with the accrued interest.

 

One day, one of them comes to see you for an important matter. During the past years, he applied for many credit cards and lines of credit with great promotions on rate and lending conditions. He travelled, bought a new car, dressed with very nice looking clothes…. and maxed out all his credit cards.

 

You know that there is an obvious possibility that payments will be late, that you will have to follow-up with him and maybe harass your friend to get your money back. It might damage your friendship and you might also never see a part of the amount he is asking for. I am not even counting the effort you will have to make in order to see you monthly payment.

 

So my question is the following; would you, know from your experience that this loan will bring nothing but trouble, lend money to this friend of yours? If so, imagine that he is your friend’s friend and that you rarely heard of him. Would you still lend him money even if he makes an hour speech about how he is responsible and this was all bad luck? Now, you are starting to see banks’ point of view. They want to lend money to people that will not bring trouble. They do not want to go after their money every two payments. Follow-up requires man power and that costs money. As you probably know, banks do not love to waste money. They are in the business of money to make money, not to give it away for free. Several people think that banks are like governments, they owe the population something. Unfortunately, banks are like any other company, their goal is to provide services in return of profit.

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July 28, 2007, 6:00 am

Weekend Roundup: July 23rd to July 27th

by: The Financial Blogger    Category: Uncategorized

Before reading this post, you should turn your eyes a little bit further on the right and have your mouse pointer follow. Then, you will notice a big orange button… CLICK ON IT! If my “persuasion technique” does not work on you, well please just sign up for this blog RSS Feed by clicking on that orange button;-) Then, you’ll get my daily post in your email everyday!

 

Weekend Roundup: July 23rd to July 27th

 

Yikes, that was a bad week on the market! I am pretty sure I will not show positive result next week for my Smith Manoeuvre monthly update! In the meantime, here is this week recap:

 

July 23rd : Is the Smith Manoeuvre a Secure Way to Create Wealth? : In this post about the Smith Manoeuvre, I try to change our perception of our mortgage and see it as a simple rent. Remember, risk is nothing real, it is only a perception.

 

July 24th: My Big Plan for Retirement Part 1: Where Am I At? : I am starting my plan to retirement. I know, I am only 25 but I need to get this thing going if I want to drive my Beamer to the golf course every morning at 55!

 

July 25th: Selling My House, Quite an Experience Part 2: I am doing a comparison between selling your house with an agent (see previous article) and selling it by your own.

 

July 26th: My 100th Post! : Yep, my first milestone since I started this blog in November. I must admit that writing 1 or 2 posts a week was not really blogging back then. I really started this blog seriously this May. I am really happy to find out that many people like my blog!

 

July 27th: Ethanol? You Must Be Kidding Me! : Is Ethanol the energy source of the future? I am not convinced by that. Read this post if you want to find out why.

 

An extra note on this beautiful Saturday, my wife is due on July 29th, but do not worry, I prepared post for next week. It is just that I will not comment that much for the next two weeks. See ya!

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July 27, 2007, 6:00 am

Ethanol? You Must be Kidding Me!

by: The Financial Blogger    Category: Investment, Market and Risk

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While several countries are seeking for more uranium in order to produce a more “green energy”, some other, not to mention the USA, are looking at corn to fuel their Hummers. I am going off topic for a second, but I just can’t wait to have GM producing Hybrid Hummers so I can buy one and not feel guilty about the environment! In fact, ethanol is another big buzzword in today’s energy industry. Is it really that good? Why there is so much advertisements (or should I say pressure?) from many companies?

Is it that effective?

When a topic is highly debated, scientists are found in the middle of the battlefield. Some of them are claiming that ethanol is the energy of the future. However, some others considered the opportunity cost related to the resources required to produce this resource. According to some studies, it requires so much energy to produce ethanol that it is not as “energy efficient” as it seems. Not only that, but it would require several acreage of corn to produce enough ethanol to compensate for our oil needs.

The price of corn is therefore increasing and several committees are worried about third world countries that count on corn to feed their starving population. Industrial countries might sacrifice acreages of land in the honour of God Money. Our new martyrs will be left without anything to eat so we can ride our cars.

Other studies mention also that ethanol might not be much more efficient compares to the new generation of low consumption motors. Several car companies injected millions to create vehicles that will not require as much gas as before. You also have hybrid model that works partially with electricity. These new technologies might comprise ethanol’s future.

Why is there so much pressure around ethanol then?

First, USA does not like the idea of depending of Arab countries for their energy supply. At any time, they can be taken as hostages and another oil price crisis may arise. As they do not have much oil on their land, they need to find alternatives. Ethanol is one of them. In addition to that, this resource is much greener than oil and other derived products.

Second, the massive production of corn will incur another effect; it will drain out good soil from everything. We already know that monocultures require additional chemical products or manure to equilibrate the soil’s composition. To keep the soil high on minerals, pharmaceutical companies are promoting their products. They designed chemicals for this purpose. Therefore, we are now looking at the biggest industry teamed up with cars and pharmaceuticals giants that want us to ride on ethanol. Do you think it might happen?

Even if ethanol is not the right substitute to oil, we must find an alternative. Beside hybrid technologies (electric power combined to gas), I do not know many other solutions. Does anyone is aware of other technologies that might reduce our oil fixation?

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July 26, 2007, 6:00 am

My 100th Post!

by: The Financial Blogger    Category: Miscellaneous

Before reading this post, you should turn your eyes a little bit further on the right and have your mouse pointer follow. Then, you will notice a big orange button… CLICK ON IT! If my “persuasion technique” does not work on you, well please just sign up for this blog RSS Feed by clicking on that orange button;-) Then, you’ll get my daily post in your email everyday!

Whoa! I definitely have a feeling of achievement when I think that I reached this milestone. When I first started blogging back in November 2006, I was doing it on and off, about 1 or 2 posts a week without expecting anything. While I am still far away from my personal goals, I can see that my blog is getting bigger every day. Back in May, I decided to fully go into it and blog seriously. I have committed to myself to blog on a steady basis. So this is where I am, laptop on my knees, sitting in a bus, having people looking over my shoulder all the time, typing, typing, typing.

Since then, I have had the opportunity to meet with great people. I have had the chance of being interviewed by The Globe and Mail about social lending, debate on the Smith Manoeuvre with Canadian Capitalist and Four Pillars and become a guest writer with the Debt Swap Strategy for Milliondollarjourney.com.

While Milliondollarjourney and Canadiancapitalist are par of my favourite blogs, I also discover many others through my blogging adventure. Four pillars, Financial Jungle, Candian Dream, Lazymanandmoney and Mr. Cheap are definitely part of my morning routine. Thanks to you all as you surely are bringing new and refreshing thoughts on the world of personal finance.

I am not blogging only because I love finance but also to improve my English writing skills. I am pretty sure that I draw up smiles on your face by using inappropriate words or with analogy that does not necessarily make sense. However, you can be sure of one thing, I am trying my best to improve my writing and become more fluent in this language that was almost unknown to me 5 years ago.

I am sure that my fellow bloggers remembered their 100th post, it kinds of outline the work you did for a while. I must admit that my biggest reward for blogging is the opportunity to read your comments and your emails. I thank you for being there, somewhere in a Starbucks, on your computer at home while having breakfast and reading what I have to say about finance. I just can wait to cheers for my 1000th post now!

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