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Sell stocks to pay debt?

13K views 44 replies 18 participants last post by  SeanOConnor 
#1 ·
I had to purchase a new car (car accident and wrote mine off) I decided to buy a new car bc of the travelling I do. I was planning on buying a new vehicle once I saved enough to purchase it, so I did already start saving.

Purchase price was approx $40gs

AFTER the little bit of savings I had to buy a new car and the insurance money I now owe $17,000 on a line of credit at 3.35%

I try and put $1,500-$2,000/month of the loan.

Now I purchased RBC shares awhile back(2 years ago?) and currently have approx $12gs total, set up on a drip plan. This is also in my TFSA account

I HATE having debt especially when it has to do with a vehicle, so I was wondering if it would be smart to sell those shares to help pay down this loan faster, or will I bet better off to just keep paying the loan the way I am and just wait till the end of the year till it is payed off.

Thanks
 
#2 ·
If you are paying 1500-2000 on the loan every month I would probably just hammer the loan off in the 8-9 months that would take and keep your savings in your TFSA. Your borrowing costs for that little duration shouldn't be much and I know I would hate to be without accessable cash.
 
#4 ·
When I got hurt, and was going steadily more into debt, I faced this problem on a daily basis...I could sell my investments, still in the early stage of development, and get out of debt, or I could hold on and stick with the plan...

Let me tell you, it caused many sleepless nights...

What I kept coming back to, however, was the fact that these investments were designed to grow and produce income. If I sold them early, I'd have no debt, but I also would have no method to generate future income...short term pain, for long term gain.

It wasn't easy to ignore, but I'm glad I did. I've always treated invested money as "spent money", the same as if I'd bought a cup of coffee, and I rarely looked at their progress (being a buy and hold investor).

After a few years, I reached the tipping point where my passive income generation outgrew my spending, I never actually noticed as I was struggling to survive still. My investments continued to grow, I was still doing what was required to survive. One day however, when I was doing a job I particularly hated, I pulled up part of my portfolio and realized that it was making more in a day, than I made in a week. I finished that project, realized I was out of debt, and then started the long process of trying to get out of "survival mode" and back into living.

I'm certainly glad I stuck with my plan.
 
#6 ·
Shares of RY yield 4% currently. You said you bought the shares about 2 years ago. Assuming your average cost is $60/share, your yield is about 5%.

Therefore, it would be unwise from a mathematical point of view to sell your shares in order to pay off the loan.
Why would you sell something yielding about a 5% after tax return to pay off something costing you 3.35% after tax, especially when the former has growth potential?

Keep the RY shares. This is an easy decision.
 
#15 · (Edited)
Percentages are all well and good for some but I plan in $$s. So, assume a year to pay off the $17K at 3.35% ... that's $570 interest. Assuming 160 shares RY with $.77/share/quarter. Over a year that's $492 dividends (dripped but no matter, and TFSA sheltered). No need to get wrapped around the axle over complicated (and possibly costly) ways to reduce that assumed measly $78 difference, is there?
 
#10 ·
I actually saved $3,300 buying it outright. If I used there 0% the vehicle would have cost me more and paying it off in my time frame I wouldn't pay that much in interest so I went that route. (This is not a deal I made with the salesman, it was in the fine print on 3 different vehicles I was looking at)

travelling is not so much for work but lifestyle. (Family cottage, vacations etc) wanted reliability etc
 
#23 ·
... sell some RY to pay off the loan.
re-borrow the same amount and use it to buy BMO.
deduct the interest paid on the investment loan ...
I was only suggesting buying something other than RY to avoid running afoul of the superficial loss rules.
It would take the superficial loss rules out of the picture.

If the OP likes RY and the price that it is available at in the taxable account, are the superficial loss rules a problem?
The OP only has to wait 30 days after the purchase to be in the clear, correct?

How likely is the OP to be forced to sell the RY shares in the taxable account in that short at time frame?


Then too ... how does it work out if the OP turns off the DRIP and withdraws the dividend income to pay down the loan at a faster pace?


Cheers
 
#22 ·
I wonder how many of the people who are recommending staying in debt are considered "wealthy", as opposed to those recommending paying off debt.

Now, I'm not saying all debt is equal, but personally, without debt, I wouldn't be as wealthy today as I am. Debt is a tool, if used wisely, you can build something good; used poorly, you can wind up in the hospital or dead.

I find the fear of debt however, handicaps a lot of people. I also find the same thing with "large numbers", people get scared by them. In the grand scheme of things, we're not talking about a lot of money in this particular case...
 
#27 ·
Originally, I would have said pay off the debt, and sell the stock. However, since its a relatively small amount, the dividend covers the interest AND MOST importantly, the OP has a plan to aggressively pay off the debt with out selling, I say hold the stock, and keep paying it off aggressively. I have seen many people in real life that hold the stock or vestment because at the time the investment is doing well, but do nothing to reduce their consumer debt load. Then if the investment tanks, they are in bigger trouble, and generally because they had no plan in the first place, the are in trouble.
 
#29 ·
I think a better question to ask would be:

Would you borrow to invest?

Basically that's the question at hand. Selling to pay debt and borrowing to invest is the same thing. If you are comfortable borrowing to invest, then keep the shares and pay the loan. If you wouldn't borrow to invest, sell the shares and pay the loan.
 
#30 ·
It is important to be comfortable borrowing to invest ... however I'm not sure keeping the shares in the TFSA is the same as what was suggested in post #11.

This version means the loan interest is not deductible against income so there is one source to pay off the loan, after-tax dollars.

The version from Post #11 means there likely are three sources to pay off the loan. A reduced amount of after-tax dollars, the tax refund where the investment loan interest is written 100% against other income and a reduced amount of dividends (dividends will now be taxable).


I'd want to run the numbers before making a decision between the choices. If the OP wants to take time to learn about the choices or is not comfortable borrowing to invest, then two easy ways of speeding up the rate the loan is paid off come to mind. The first is to shut off the DRIP so that the dividends can also be used to pay down the loan. The second is to find things to skip or ways to reduce expenses so that more of after-tax income can pay down the loan.


Cheers
 
#31 · (Edited)
^ It would be interesting to see you guys run some numbers. Here's my quick and dirty numbers, you guys use real numbers, thanks.

Assume I have a $12K loan with interest $1K at the end of a year, and I decided to pay off the loan by the end of the year.

a) I cash in the TFSA, pay the loan. I Borrow $12K at interest of $1K ... buy stocks, start getting monthly dividends totaling $1K by end of year. At the end of the year, tax savings on $1K interest is let's say $400 (assume 40% marginal rate) so loan costs $600 interest. Also at the end of the year, dividends are $1K with let's say 30% tax (I've read that's about right) leaving let's say $700 profit ... hmmmm, $100.

b) Or, I leave the TFSA intact, use the dividends to compensate for the interest paid on the loan. Repay the loan with taxable income. The $12K probably cost let's say $15K before tax ... but that's what the $12K after tax stocks in the TFSA cost in the first place ... $15K.

So it seems to me, at the end of the year, I can either have stocks in a TFSA paying me non-taxable dividends, or stocks not in a TFSA paying me taxable dividends. It also seems reasonable that with the new year, I'd sell the stocks, putting them back in the TFSA.

As already posted, I just don't see a benefit to cashing in the TFSA to repay the loan ... I'd just let the TFSA continue paying dividends, DRIPed (???) no matter, covering the interest.

A problem to me with the cashing in borrowing and investing solution is uncertainty, not risk.
 
#33 · (Edited)
^ It would be interesting to see you guys run some numbers. Here's my quick and dirty numbers, you guys use real numbers, thanks ...
Trouble is ... only after the OP investigates what if anything is a better rate than the LoC at 3.35% will "real numbers" be more closely approximated.

If that's the number for the interest being charged, then going the investment loan route does not look attractive (at least with RY shares) as re-buying at roughly $75, means about $160 shares with a dividend income of $480 before tax. The dividends will have a better tax rate than employment income but the full amount won't be available to use where the interest is at $402 (assuming 3.35%). This would be too close to even for my liking to consider it.

At this point in time, it looks better to me to shut off the DRIP and periodically withdraw the dividends to pay off more of the loan or maybe consider selling a portion (say $2K) to boost what the taxable income plus the tax free dividends are paying off.


... As already posted, I just don't see a benefit to cashing in the TFSA to repay the loan ... I'd just let the TFSA continue paying dividends, DRIPed (???) no matter, covering the interest.

A problem to me with the cashing in borrowing and investing solution is uncertainty, not risk.
Where one is leaving the dividends in the DRIP, one is taking more and more investment risk ... in a bad timing situation, the value might not be there to use (same as the original shares).

On the other hand, shutting off the DRIP means one can use 100% of the dividends paid to pay down the loan earlier and allows the taxable income to pay down more as well.


I'm happy to see some of the replies above. Keeping a debt while you maintain a stock position is effectively: leveraged stock investing.
It's fine as long as you realize what leveraged investing means: it amplifies your gains or losses. Personally I think the stock market is already volatile enough as it is, and I never borrow to invest other than very short periods.
Question is ... how volatile does the OP think the LoC as well as his sources of income in what appears to be a relatively short time to pay off the loan?

I'm curious as to the loss amplifications you see as the worst case. I can see a job loss possibly forcing a liquidation at a bad time but I'm not sure dividend cuts or rising LoC rates as that big a risk in what post #2 estimates as something around eight to nine months to retire the debt.


Cheers
 
#32 ·
I'm happy to see some of the replies above. Keeping a debt while you maintain a stock position is effectively: leveraged stock investing.

It's fine as long as you realize what leveraged investing means: it amplifies your gains or losses. Personally I think the stock market is already volatile enough as it is, and I never borrow to invest other than very short periods
 
#42 ·
James I like reading your posts because you tell it like it is.

The golden rule to money management, never spend more then you make ( even a child can understand this rule, do not make it complicated)

Owning stocks when money is owed is simply bad money management.
 
#37 ·
For the car ... this is true.

What started the "borrow to invest" discussion was post #1 asking about selling the stock to payoff most of the loan versus keeping the stock assets in the TFSA. This is not an exact comparison as there is no tax benefit but it is similar.

The comparison becomes much better in post #11 where the suggestion is to sell the stock in the TFSA, payoff as much as possible and then borrow to re buy the shares in a taxable account. The portion that is paid off becomes a conversion of non-deductible interest paying for a depreciating asset (i.e. the car) to deductible interest for a fluctuating asset (i.e. stock).

(Call this a SM for cars? :biggrin: )


Cheers
 
#39 · (Edited)
Don't forget in the OP's case, selling the stocks has paid off $12K of the $17K car loan.

Even at current rates, the dividends cover the investment portfolio interest so now the employment income that used to need to cover $570 (3.35% x $17K) interest charges now only has to cover $167.50 interest, with more paying down the loan. At the end of the year, assuming 2015 Ontario tax rates, the eligible dividends will attract 8.46% taxes that weren't there before ... but the refund coming back is 30% so it will cover it plus excess that can be paying down the investment loan or car loan as needed.

Where the dividend income increases, that's more income to pay down the investment loan.

This is all before considering what has happened to the share prices, where if there is a substantial gain - all else being equal, instead of the 30% on additional employment earnings (ex. overtime work), selling the shares will attract something like 16%.


As I say, the differences are too slim for my comfort but it was a no-brainer for me in 2008/2009 as the differential was 3% versus dividends/cash distributions of 6% to 30%. In the time between, the dividends/cash distributions have been increasing where with the latest BoC cut, the 3% rate has been dropped.


Cheers

PS

Granted ... 2008/2009 is cherry picking but with twelve of sixteen stocks bought having share price increases of between 80% and 240%, it seems like the interest paid is working to my benefit.
 
#45 ·
Debt Management

For the purpose of a general forum discussion whereby thousands of Canadians are reading here for advice, I completely agree with lonewolf when they say "Owning stocks when money is owed is simply bad money management."

With Canadians racking up an average of $28,000 of non-mortgage debt we as a country have a serious problem on our hands, and people should really be focusing on getting their financial situation in order.
 
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