The Advantages to Collateral Debt

When we think of debt, most of us instantly turn a blind eye. No one wants to be in debt yet the majority of us end up there at one time or another. I guess it’s no surprise when we are targeted with thousands of advertisements every day without even realizing it. According to folks from the marketing research firm Yankelovich, the average person is exposed to a whopping five thousand ads per day!

But what if I told you that debt could actually be a great thing! You could not only purge your spending habits but benefit in the process. No, I'm not talking about maxing out your credit cards to trade stock & crypto currencies in the hopes you become a millionaire overnight. I’m speaking of completely practical solutions for everyday people, even those just getting started in life.

Img Src: Michalos, Hoyes, run-from-your-debt, https://bit.ly/2TZ4IBC

Let's start off with the basics. Joe needs a new laptop but lacks the disposable income to buy one out right at the time, so he has a few options and we will look at three of them. Joe could finance the laptop directly through the retailer, take out a personal loan with his bank or look for a collateral solution. If Joe chooses to finance directly through the retailer, he is likely looking at paying a 20% interest or more over the course of one to two-year terms. This is ridiculous and how retailers take advantage of those in need so we will immediately toss this option out right away.

Joe now considers a personal loan with his bank and while it's certainly a better alternative than financing through a retailer, it isn't the best. Joe has a reasonable credit rating and is offered an unsecured personal loan at a 3.49% APR. While this might seem like a good solution, it also happens that Joe recently paid his car off in full and has an asset. This opens up much better possibilities for Joe so he proposes using his asset as collateral for a reduced interest rate. Congratulations Joe, not only have you got that laptop you wanted but you have reduced your interest down from 20% to 2% leveraging your asset as security. Not to mention Joe is also far more likely to keep up with his payments knowing his cars at risk than an non collateral alternative.

Some may not like the idea of putting something at risk but if you plan to pay you shouldn't be concerned whatsoever and take advantage. Sometimes the largest value when taking on debt is the peace of mind and focus risk gives you. It’s certainly much better than getting distracted and taking on more than you can handle or incurring late fees. Pretty cool eh?

If you thought that was cool, I was just getting started, let's go bigger!

Img Src: Leasca, Stacey, debt-snowball-method, Times, https://time.com/5667730/debt-snowball-method/

Sally is 30 years old and married to Doug, they both graduated University and have gained employment in their respective professions. Doug and Sally have a family but are still renting their home due to the real-estate bubble and hardship of putting together a down payment. Sally & Doug are currently making car payments, taking care of three children, and can’t afford to scrape together their down payment. Fortunately, they have been setting aside money for retirement from an early age and placing this in a tax-free savings account (TFSA) to defer capital gains. This money however has not been dormant and was placed into index funds and select handpicked stock that’s been performing well. Unfortunately, this money was meant for retirement and they refuse to touch it. Not only that but if they choose to pull even a portion of their fund’s they will incur capital gains plus lose out on the upside potential of their now closed positions. Sally recognizes they need to get a larger property for their growing family and Doug suggests pulling the 50k they have saved together for retirement even if it means they will lose 15K to taxes and have to start over. Hold Up! Doug what are you thinking man!

What if you could access the money you needed without even touching your portfolio? Now you're thinking Doug! So, sally and Doug decide on a property that suited their needs and need to place 20k as a down payment plus incur about 5k in combined fees for everything to close the deal. They visit their bank and take out a loan using their stock portfolio held within the TFSA and leverage 50% to meet the requirements. In doing so not only do they get the new home they wanted, they don’t have to listen to the twins fight all day sharing a bedroom! (just joking, but really haha).

Doug & Sally now have an asset they can later pull equity from (Il save that for another article) instead of paying someone else’s mortgage. Sounds good? That’s not all! They still have their stock portfolio that continues to benefit from annual equity gains and compounding dividends! This is the glory to debt many people fail to understand and why the wealthy continue to pull ahead. The tax system is very easy to take advantage of once you understand it and so is the debt system.

Just by changing one simple action (not selling their portfolio), they have kept taxes deferred, maintained annual portfolio gains for retirement plus now benefit from equity gains and asset appreciation! This isn‘t a small number either, this simple action will have saved them a few hundred thousand dollars over the next 5 years

Pretty cool eh? Let’s go bigger!

Haha gotcha! This comes to about a thousand words and I don’t want to overwhelm anyone so I will save the best tricks for another time. There is so much to learn in this world and if you put the effort into it you can live freely just like me! The trick isn’t always whoever makes the highest income like all these wannabe articles with get rich quick drop shipping schemes etc. (which is an extremely over saturated 10+ year old market btw..). The true trick from my experience is simply managing your money properly and learning the system. I started in retail at the bottom like everyone else and never once did I hold a upper class job with a great wage. Instead of partying after work I learned to manage my money, understand basic economics and trade stock fundamentally using analytics only as a support. I also learned to game the tax system which is the largest knowledge-based asset you can ever give yourself. The true key to wealth isn’t making a million dollars overnight. The key is to make yourself appear extremely poor, that’s when you become rich. If you don’t understand what I mean by that it’s OK, most people don't 😉

Enjoy my fellow steemians,
Kyle - StarChild