Not all debt is bad

Let’s talk about debt — namely, the fact that I have a lot of it. However, the amount that I owe is not nearly as high as the amount of assets I have.

Think about it this way:

  • You have a house worth $300 000 and owe $200 000 on it
  • You have an RRSP/401(k) loan of $10 000 and an RRSP/401(k) of $50 000
  • You have a student loan of $20 000 and an investment portfolio of $30 000

Each of those points is an example of a person who has borrowed money to make investments with the intent of increasing their net worth. When I was in college and university, I signed up for student loans, just in case. Seeing as I was earning 20-30k a year (before taxes), was receiving over $5 000 a year in aid and only spent around $15 000 a year (including tuition), I was flush with cash. I wasn’t too into travel back in the day and so I socked my money away in a bank account and earned a fancy pants 3% interest rate (thanks 2008 ING!).

After awhile, it occurred to me how foolish it was to just have the money sitting there, hanging out and doing nothing. I began speculating in currencies (why?!) and promptly lost about 20%. I backed off for awhile until 2010 when I faced my investing fears and got back into the game. I maxed out my TFSA and watched my money grow and grow and grow.

Not all debt

Now. I speak a lot about investing my student loans but let’s discuss a technicality… Over the years, the sum of my investments is approximately what my student loan amounts to. I didn’t take the money directly from the bank and immediately invest it. In fact, if we really want to jump on the “investing your student loan is illegal!” bandwagon, let’s say that I lived on loans and invested money from my full- and part-time jobs.

Like most people, I finished university with a whack of debt — but that was the plan after all. After graduation, I did foolish young millennial things like going to Europe for three months, being lazy and working part-time for half the year and yet I still never ended up with a negative net worth.

In another twist of fate, I have so much debt that I can apply to have my loans deferred and benefit from lower payments and no interest accrual. In other words, I have a loan and a healthy stock portfolio. This is no different from holding a mortgage on a house or having an RRSP/401(k) loan.

I realize that this seems like a backwards philosophy — why not just pay off my loan if I have the money? Well, it’s almost the same as people who have a $10 000 emergency fund and a $10 000 loan balance — the difference is that I’m leveraging my money to make more money rather than making sure it’s safe in the bank.

I don’t feel nervous about having the money invested for the following reasons:

  • My income is steady and almost double what I need to live comfortably on
  • I have pretty good job security and excellent skills to easily find a new job in the event that I lose my job
  • I will not make enough money to get out of deferment for a long, long time
  • Going back to school may be on the radar in the next few years (at which time, I will have no loan payments)

In other words, my money is going to be invest for the mid-long term and my portfolio is set-up to reflect that. The idea that I am taking on more risk because my money is borrowed is ridiculous. I have the same amount of risk investing $10 000 as I do investing $20 000 with a $10 000 loan.

Let’s stop avoiding debt and start using it wisely.

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