# Sell stocks to pay debt?



## D-ru (Nov 27, 2011)

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


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## Emjay85 (Nov 9, 2014)

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.


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## My Own Advisor (Sep 24, 2012)

Depending on your other debts and liabilities, I'm not too sure it makes sense to have TFSA assets when you have a sizeable LOC. 

That said, if you can kill the debt aggressively (within 8-9 months) then keep the assets.


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## Just a Guy (Mar 27, 2012)

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.


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## cainvest (May 1, 2013)

If your paying down 1500 or more a month then just keep paying the loan, at 3.35% its not to bad. If you really hated debt buying a cheaper car would have been a best move.


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## KaeJS (Sep 28, 2010)

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.


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## rikk (May 28, 2012)

^ Just was doing a similar quick calculation ... the 160 or so RY share _dividends_ are paying the loan interest, keep the shares.


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## D-ru (Nov 27, 2011)

Thank you very much for the responses. I think I new the smart choice but thought I would ask. I will keep the shares and keep knocking down the debt.


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## Rusty O'Toole (Feb 1, 2012)

I'm wondering why you didn't take advantage of the 0% loans offered by some car companies.

Or, if the travel is business related, you could lease and write off the whole thing.


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## D-ru (Nov 27, 2011)

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


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## gardner (Feb 13, 2014)

How about:

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.


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## My Own Advisor (Sep 24, 2012)

Gardner, are you a BMO shareholder?


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## KaeJS (Sep 28, 2010)

Hold on.

D-ru,

How did you get a PLOC at 3.35%?

Is this a secured PLOC?

My unsecured PLOC is 4.1%.
I want 3.35?

Which bank/institution are you with?


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## gardner (Feb 13, 2014)

My Own Advisor said:


> Gardner, are you a BMO shareholder?


I hold all the banks, except, for no particular reason, TD.

I was only suggesting buying something other than RY to avoid running afoul of the superficial loss rules. BMOs overall performance would be similar to RYs, at least for the duration of the loan.


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## rikk (May 28, 2012)

rikk said:


> ^ Just was doing a similar quick calculation ... the 160 or so RY share _dividends_ are paying the loan interest, keep the shares.


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?


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## gardner (Feb 13, 2014)

rikk said:


> that's $570 interest


It is $570 after tax. Before tax it's likely over $800. There's another $230 on the table by restructuring as an investment loan.


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## My Own Advisor (Sep 24, 2012)

Good point about the loss rules.


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## OhGreatGuru (May 24, 2009)

I can't believe the number of people who are recommending he stay in debt rather than pay off a car loan when he has assets in his TFSA. That's what the TFSA is for! No wonder consumer debt is thru the roof!


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## rikk (May 28, 2012)

^ Tax free dividends in a TFSA that are paying the interest on that car loan are what I'd liken to golden eggs ... kill the goose that lays the golden eggs you say?


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## Oldroe (Sep 18, 2009)

You have a good acierated plan to retire your loan so I would keep the bank stock. Debt is not always bad in this case necessary for the short term.


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## 0xCC (Jan 5, 2012)

gardner said:


> I was only suggesting buying something other than RY to avoid running afoul of the superficial loss rules. BMOs overall performance would be similar to RYs, at least for the duration of the loan.


The OP said they have held RY for about 2 years so based on RY's performance over the last couple of years they either have no loss or a very small loss (depending on how the DRIP timing worked out and when exactly they originally bought). Also, since these shares are currently in a TFSA account and they wouldn't be able to claim the loss I don't think that the superficial loss rules apply. Although they would apply if after they paid down the loan they were in a capital loss position and tried to put the shares back into the TFSA.


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## Just a Guy (Mar 27, 2012)

OhGreatGuru said:


> I can't believe the number of people who are recommending he stay in debt rather than pay off a car loan when he has assets in his TFSA. That's what the TFSA is for! No wonder consumer debt is thru the roof!


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...


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## Eclectic12 (Oct 20, 2010)

gardner said:


> ... 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


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## Eclectic12 (Oct 20, 2010)

0xCC said:


> ... since these shares are currently in a TFSA account and they wouldn't be able to claim the loss I don't think that the superficial loss rules apply.


Not to the shares in the TFSA ... though if the RY shares are in a loss position, maybe turning off the DRIP and using the dividend income to accelerate paying off the loan is a middle of the road path. It won't be as fast but it will be with tax free income where any expense cuts to regular after-tax income would also be used.



0xCC said:


> ... Although they would apply if after they paid down the loan they were in a capital loss position and tried to put the shares back into the TFSA.


Or as I understand it ... if the OP buys then sells RY in the taxable account in 30 days or less. 

Cheers


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> ... I find the fear of debt however, handicaps a lot of people...


Fear as well as not understanding the risks/rewards. Where the OP is comfortable with the current car loan debt, their cash flow supports the risk of rising interest rates and their investment choices ... converting non-deductible interest into tax deductible interest seems like it has potential.

Of course there is the non-tangibles of what a good nights sleep is worth ... :biggrin:


Cheers


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## 0xCC (Jan 5, 2012)

Eclectic12 said:


> Or as I understand it ... if the OP buys then sells RY in the taxable account in 30 days or less.
> 
> Cheers


Right, buying in the TFSA first and then selling in the taxable account within 30 days at a loss would fall under the superficial loss rules (and set up a situation where the capital loss would never be able to be claimed since the "loss" is now trapped inside the TFSA where losses can't be claimed).


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## Plugging Along (Jan 3, 2011)

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.


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## Plugging Along (Jan 3, 2011)

Just a Guy said:


> 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...


I am fairly debt adverse, and not sure what you consider wealthy, I think we are doing alrigh, but could we be making more. Sure. 

I think leverage or debt is alright if you know what you are doing. It helps you get there that much faster, however, if you don't it can sink you even faster. I will be honest, sometimes, I am not sure if I know what I am doing enough, it seems to be fine, but I am not willing to risk my families security for more. 

Outside of my RRSPs, I only invest on what I can afford to lose. I have had many many stocks go down to zero in my early days, so for that reason, I don't borrow to invest. I do invest in real estate and have leverage there, only because I grew up with it


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## rsyl (Aug 15, 2014)

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.


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## Eclectic12 (Oct 20, 2010)

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


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## rikk (May 28, 2012)

^ 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.


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## james4beach (Nov 15, 2012)

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


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## Eclectic12 (Oct 20, 2010)

rikk said:


> ^ 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.




rikk said:


> ... 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. 




james4beach said:


> 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


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## rikk (May 28, 2012)

Eclectic12 said:


> 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 ... Cheers


It sound like you're saying investing is risky  (the value might not be there to use), but if it is there to use, use it to repay the loan earlier ... I'd assumed the plan was to repay the loan over one year.

Fwiw ... I see money as being virtual ... e.g., dividends are accumulating in one account (countering the interest payments), and income is being spent in another account (paying the interest), the result in this case looking to be null ... 

I'm constantly bartering with myself over purchases (as above) as in ... ok, if I can find a spot to park on the street rather than pay parking, I can buy myself one more beer ... and vice-versa ... thanks for your analysis and enjoy the day!!!

Bartering ... thinking it over, I'd likely switch to cash dividends versus DRIP for that one year period, and so for sure cover that interest ...


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## OhGreatGuru (May 24, 2009)

Comparing it to "borrowing to invest" is inappropriate. OP is borrowing to buy a car, that depreciates as soon as it is driven off the lot. It is not an "asset" with any chance of making a positive return; or of even holding its original value.


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## Eclectic12 (Oct 20, 2010)

rikk said:


> It sound like you're saying investing is risky  (the value might not be there to use), ...


Isn't life? :biggrin:

There's two risks here ... where one sells in the TFSA, retires most of the loan and then borrows to invest, there is the risk the investment drops. 
If one sells to play down the loan, the risk is that the investment takes off where based on the current car loan retirement is under a year.




rikk said:


> ... but if it is there to use, use it to repay the loan earlier ... I'd assumed the plan was to repay the loan over one year.


If the loan is tax deductible and the income it's being written off against to get a tax refund is stable, what's the rush to pay it off?




rikk said:


> ... Fwiw ... I see money as being virtual ... e.g., dividends are accumulating in one account (countering the interest payments), and income is being spent in another account (paying the interest), the result in this case looking to be null ...


That is one way to look at it ... the OP on the other hand says he does not like debt so using the dividends to pay off the loan provides another source to increase what is paid down by month and this source is tax free, 100% of the cash is available. 




rikk said:


> ... thinking it over, I'd likely switch to cash dividends versus DRIP for that one year period, and so for sure cover that interest ...


It would be an easy source of addressing the "I don't like debt" part which is available today with minimal changes.


Cheers


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## Eclectic12 (Oct 20, 2010)

OhGreatGuru said:


> Comparing it to "borrowing to invest" is inappropriate. OP is borrowing to buy a car, that depreciates as soon as it is driven off the lot. It is not an "asset" with any chance of making a positive return; or of even holding its original value.


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


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## rikk (May 28, 2012)

Eclectic12 said:


> If the loan is tax deductible and the income it's being written off against to get a tax refund is stable, what's the rush to pay it off?


The loan (to invest in dividend paying equities) is a tax deduction. Again, that means that if I have say a loan with $1000 interest over the year, I can deduct that $1000 from my taxable income. If my marginal tax rate is say 30%, then I'd reduce my taxable income by $1000, thereby saving $300 in taxes ... the loan would still cost me $700. But that's just me I guess, I prefer to not pay interest without a really good reason.


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## Eclectic12 (Oct 20, 2010)

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.


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## rikk (May 28, 2012)

^ Cherry picking ... is that what they call it these days  Yes, 2008-2009 would have been "a really good reason".


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## Eclectic12 (Oct 20, 2010)

There have been good reasons since ... the REIT that pays 6% versus a cost of 3% and the units went up 20% is nice. There's a double bonus in that with 70% to 100% of the cash distribution being paid is tax deferred RoC so there's almost no tax. 

This means basically all of the distribution on it's own is paying down the loan at a faster rate compared to eligible dividends and if need be, the tax refund can also be used.


Cheers


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## lonewolf (Jun 12, 2012)

james4beach said:


> 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


 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.


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## Eclectic12 (Oct 20, 2010)

lonewolf said:


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


Simple to explain or grasp ... harder to motivate.




lonewolf said:


> ... Owning stocks when money is owed is simply bad money management.


YMMV ... investments & debt are tools ... "good" or "bad" depends on their use as well as the results.


Cheers


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## james4beach (Nov 15, 2012)

lonewolf said:


> James I like reading your posts because you tell it like it is.


Thanks!



> Owning stocks when money is owed is simply bad money management.


With one exception... it's OK to use Other People's Money (OPM). This is the big secret of the financial world and the core of investment banking, brokerages, etc. Get other people to borrow the money and take the risk while you make the money.

_They_ know that's the way to do it. That's why it's crazy to borrow against your own home for investment purposes; it's exactly how you feed the parasites.


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## SeanOConnor (Apr 7, 2015)

*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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