Everyone loves to quote the fact that Canadians’ household debt is at an all-time high of 165 per cent of our take-home salary. That means that for every dollar that a Canadian takes home after tax, we owe $1.65 of that in debt.
We have all been told that there are good and bad debts, but when we don’t have a job they are all bad. However, is it possible that when you have a stable job and you are buying quality assets then all debt can be good?
The Donald and other real estate barons made all of their money using debt to leverage their assets. Once you have one property or asset payed for, you can re-mortgage it and get another one. Now you have two assets hopefully growing and making you more money. Demonizing ALL debt in our society won’t change that.
Here is how I use “good” debt now that credit is as cheap as it ever will be.
1. Homes and Mortgages
If you have expensive debt and room to re-finance on your home, this is probably the time to consolidate them all and pay them off. If you have a car loan and credit cards and maybe some lingering student debt, you’d be paying from three to eight per cent for cars all the way up to 20 per cent for credit cards (if you have department store cards at 30 per cent interest, I’m too horrified to even talk to you).
It’ll all be cheaper if you wrap it up at 2.5 per cent or whatever the lowest variable rate is. If you think that rates will increase in the next few years, getting a fixed rate will be cheaper, too. Wrap all of your debts into one product and then make the highest payments you can until they are all paid off. Try for 10 or 15 years and know that you’ll save thousands of dollars in interest and be debt-free on a specific date in the near future.
2. RRSP and Investment Loans
If you are smart with money and are good at picking investments that go up in value, an RRSP loan might be a good idea. Having a ton of extra room in your RRSP will give you the chance to fill up your extra room all at once, and if you are at a higher tax bracket it will give you a hefty tax return.
You can then push that tax return into your RRSP for next year and get MORE back or simply pay down your loan. Many people cancel their auto contributions when money is tight, but you can’t stop a loan payment.
3. Starting a Business
It might not be the best time to start a business in this slowing economy but money is cheap if you have a good plan and have customers lined up. It could be the time to go out on your own and fund the party with a cheap home owner’s line of credit.
Just remember to set an amount where you decide to walk away. You don’t want to have your business go broke, leaving you with a huge mortgage. But if you are an true entrepreneur, you’ll make it happen. I believe in you.
4. Expensive Cars or Boats
If you’ve always wanted an awesome car and you can get it at 0.9 per cent financing AND you can totally afford it, why not? At almost zero per cent car loan levels, you might never be able to afford to buy your dream car ever again with almost every payment going towards the principle. Finance, don’t lease, and then drive it into the ground to get your money’s worth.
5. Non Registered Investment Loan
If you borrow money to buy a dividend portfolio outside of your RRSP, you can write off the interest as well as get a cheap rate in the form of an investment loan or line of credit. If you are bad with investing, don’t try this. If you are good, pick or get your broker to pick awesome stocks that pay great dividends and use the dividend income to pay back the loan. Be ready for BIG ups and downs in the market and hope that in 10 years your portfolio has paid itself off and you have lots of money.
Debt is not good or bad, it is just debt. It’s up to you if you use it wisely or not.
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