After reading the title of this post, you must be wondering, “What’s going on? Did Leo’s blog get hacked or what was he smoking before he wrote this post?” No, my blog did not get hacked nor was I smoking anything (I am not a smoker). What I wanted to say is that I increased my debt by borrowing money to invest, which allows me to save more money.
How much more did I save? Over a period of nine years, I saved an extra $200,000. I will be sharing the numbers shortly.
Why Did I Increase My Debt?
About ten years ago, I had a stable full-time job and was earning a modest salary. That was the only source of income that I had and I realized that I’ll never get rich by being an employee.
Furthermore, I didn’t think that I’ll get any inheritance from my family in the future. So I asked myself, “If I wanted to achieve financial independence and not having to rely on my job for income, what can I do?” The answer was to leverage any assets that I own and try to create more opportunities to generate additional income sources.
Fortunately, I owned a primary residence and I had some equity built up in my home. That was the first time that I refinanced my mortgage by borrowing an additional $50,000 on top of my existing mortgage.
What To Do With My New Debt Proceed?
While most people incurred more debts for either personal consumption or purchasing depreciating assets such as a new car, I can only have one purpose when I incur more debts – to invest in appreciating and income generating assets.
At the time, I had two choices: either purchase a rental property or invest in the stock market. Since I started to develop a strong interest in the financial market, I chose to invest the proceed of my loan in the stock market.
It was quite a challenging and educational experience trying to build a stock portfolio similar to the one that I documented in a recent post, how I get paid by borrowing money from the bank. I almost lost all my money at the beginning due to the lack of experience with buying on margins, combine that with the 2008 global financial meltdown.
However, I remained calm, stuck with my investment strategy and weathered the global financial storm.
How Did I Save More Money?
To start with, when I first refinanced my mortgage to borrow an extra $50,000 at an annual rate of 3.5% and amortized over a 25 year period, I was only paying an additional $249.64 per month on top of my existing mortgage. An amount that I felt quite comfortable with and it did not put any additional financial burden on my monthly budget.
As you can see, I paid an additional $2,995.68 (= 229.64 * 12) in mortgage payments the first year, but only $1,717.15 was interest expense and $1,278.53 forced savings. How did I save the other $1,717.15? Read on…
What Are The Benefits When I Borrow To Invest?
The first obvious benefit was an additional $50,000 in stock assets that generate a passive source of income for me in terms of dividend payments. The second benefit was the principal payment went straight to paying down my mortgage rather than the $50,000 loan. Third, 100% of the interest portion ($1,717.15) of the mortgage payment was tax deductible as I used it to earn income. Fourth, the dividend income generated from the $50,000 in investments was taxed at a lowered rate than normal income. Last, but not least, any future gains from the stock portfolio will be taxed at a lower rate than normal income.
What Are The Risks?
With any types of investment, there’s definitely a certain level of risk associated with it. For this maneuver, the greatest risks are economic, market and unemployment risk. If the economy is bad and companies started to cut back their workforce, then I am at risk of losing my job. This will lead to a heavier burden of paying down a larger mortgage.
So, as long as I am employed and I don’t invest heavily in risky penny stocks, this maneuver is relatively safe. I have been fortunate to be employed ever since I started to borrow to invest.
What Direction Am I Heading?
As time goes by, I got more comfortable with investing and my employment salary continued to increase so I continued to borrow more. I started to take out personal loans from family members that are willing to lend me their money to invest. I’d pay them interest rates that are competitive with the going mortgage rate offered by the big banks.
With the real estate market rocketing over the last 10 years, I took the opportunity to borrow even more money to invest by refinancing my mortgage two more times.
What Am I investing In Now?
Based on my 2017’s first quarter financial update, I borrowed a total of $713,152.06 to invest. I categorized this amount of debt as the good debts in my book. I used some of the proceeds to build my dividend stock portfolio that’s currently worth about $529,829.98. The rest of the proceed, I used to purchase a rental property with a friend and as a down payment for a condo unit to be built in a couple of years.
How Much Did I Saved?
Earlier, I mentioned that part of my savings was paying down the principal of my mortgage. The other part of my savings came from the income tax refunds of about 35% of the Canadian dollar interests and U.S. dollar interest expenses.
On top of that, I am also getting dividend payments from my Canadian and U.S. Stocks. The combined value of the tax refund and dividends payments amounted to about $157,879.43 over a nine-year period.
I also pay down approximately $50,000 in mortgage principal during this period. Since I paid the mortgage and interest expense with my own income, I ended up increasing my savings by $200,000 over a nine-year period.
My Two Cents
Debt can be a double-edged sword. It can help us save money and accumulate income generating assets or it can destroy our finance. If we understand the drawbacks and threats of debt, then we can use it as a tool to manage and grow our wealth responsibly. We can also take advantage of the opportunities to leverage our existing assets to further increase our wealth.
So, does your debt help you save more money or does it cost you a fortune? What’s your two cents on this?