Yesterday, I was talking about the reason why I finance everything I could during my entire life so far and how this habit has become even more obvious during the last 10 months. Today, I’ll explain why I look to finance so often and why I am different than most people who load their credit cards and lines of credit. Remember; the key is not how much you borrow but what you do with your money.
Since I started working, I have always believed that I could make more money year after year. I started with an annual salary of $30,000 in 2003 and reached $106K last year. This corresponds to a 23% annualized increase in income. This year, I am expecting to make about $130k. While I don’t think I will be able to keep up this pace forever, I have felt comfortable in what I could achieve year to year. This is why I started to borrow a little bit more each year, knowing that I would be able to pay back my debt later on with future income (I know, so far it sounds like a great going-to-be-bankrupt-one-day story 😉 ).
What I have done with my borrowed money so far
This is where it gets interesting. Besides gifts and cars, I have used all my borrowed money to make more money. During the last 7 years I have:
– Borrowed 25K to buy land (making 4K profit within a year)
– Borrowed 20k from a line of credit to play the stock market (and generating my initial cash down for my first house)
– Borrowed 25K from my parents to buy my 2nd house (making 75K profit within 5 years)
– Borrowed 30K from the equity of my house to invest in my online company (you can guess how much profit this has generated)
– Borrowed as much as I can on my line of credit (at a ridiculously low interest rate) while I purchasing my employer’s stock (8% of my salary in earning a 25% bonus from my employer, plus stock growth, plus dividends over 3%).
Financing everything that I can so I can make some real money
When you look at my net worth statement, you notice that the bulk of my net worth is in my house and in my company shares. Both result directly from my financing strategy. The problem with financing is not the fact that you borrow money, it’s how you use it. Some call it good debt, some call it leveraging, I call it playing with other’s people money.
Can I fail? I surely can. But I have learned one thing from my parent’s bankruptcy: it hurts, but you don’t die from it. In fact, it makes you stronger. So I don’t plan to go bankrupt, but I know that if it has to happen, I would rather lose everything in my late 20s – early 30s than at 55.
Looking at 2011
This whole introspective about my finances got me thinking of my projects for 2011. I know that I will receive a significant bonus (about 10K net… maybe more). Since my RRSP contributions are already maxed out, I was hesitating either on buying a spa, going on vacation or preparing to build a garage. But now that I have written these 2 articles, I think that I am going the wrong way if I finance “bad debt” and that I would rather pay off my accumulated debt with this 10K so I avoid any bad luck on the financial side ;-).
What do you think? Have you taken any risk by borrowing money in order to make more money?
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