October 13, 2010, 5:00 am

Why I Borrow So Much Part 2

by: The Financial Blogger    Category: Pay off your Debts,Personal Finance
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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.

Looking forward

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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Comments

I thought this way before but lately I’ve decided to increase another kind of leverage – delaying consumption purchases and reducing some of them to give me more flexibility with my business, investments, and savings now. While I certainly could borrow enough to enjoy and invest today I believe I’ll get more out of this by being more focused on earning what I want to get. If it all works the way I plan it won’t be long before I can do what i want without having to borrow that much, and if it’s delayed a couple of years I don’t have to worry about keeping up my lifestyle. Plus there are actually advantages to things like not living in a house so big your kids can get lost without going outside 🙂

by: The Financial Blogger | October 13th, 2010 (10:21 am)

@Richard,

I am more looking toward paying down my debts in 2011. While borrowing as much as I can since 2003 was a great strategy, I feel that I should pay off a few debts 😉

Your strategy is amazing. It takes some nerve to finance your various ventures like this, but this is how things are being built,aren’t they? Companies act no different. They always have liabilities on their balance sheets. Why should individuals not do the same?

Of course you took a risk, I don’t think that is in question BUT it was a calculated risk and that is not a bad thing.

by: The Financial Blogger | October 13th, 2010 (12:33 pm)

@Money Obedoience,

thx for your comment. Since we can hardly sell shares of our name, we rather put our name as guarantee for a loan from the bank 😉 it’s all a matter or arbitrage between what you earn and the interest you pay 😉

You are a risk taker – good for you. (And, I am glad it all has worked out so well.)

We haven’t really taken much risk on investments. However, my husband has taken some risky jobs. (Giving up good salaries to join start-ups, that kind of thing.) We have been fortunate too in that it has always been worth it.

Keep it up!

Those risks you took are certainly out of my league but I have borrowed from my LOC to buy investments. I was using the dividend payments from a trust to pay my monthly payments. The trust cut its dividend and I had to sell some stocks of another company to pay for an unexpected tax bill. Two out of three companies are still paying their dividend and I wouldn’t mind it if they raised their dividend either!

The biggest risk I have taken recently is to launch my webstore, but I am trying to finance that with funds from its revenue stream. This is making growth slower but I find it is the most feasible way for it to grow in my situation. Maybe my risk there is that I have not financed it with my LOC to give it a big push and get some advertizing and marketing going.

Good point about not being able to sell shares – with a business it’s better to finance with debt if the terms are reasonable because you keep all the profits after you pay it off 🙂

The one caution to this is that you have to know what you’re financing very well (and even the largest companies make this mistake). I’m glad I haven’t used much leverage in my business because a lot of the thing I’ve done, I have now decided weren’t worth the returns even without leverage. Any borrowing to increase them only would have made them harder to fix.

I think I’m on the right track now but only when I start to see the results I expect will I consider leverage if necessary to increase those results a bit. A local (and much larger) company in a similar business that I respect makes it a point not to use leverage so that is still an option at all times. The discipline it’s required so far has definitely been worth it. Exposing yourself to difficult experiences so you’re forced to find a solution is another kind of leverage that most people don’t use!