Smart Reasons to Save, Use and Invest Money

When Debt is a Good Thing

Back in the post called “Back in Debt But It is Different this Time“, I mentioned that instead of buying my used Toyota Camry outright, I decided to take advantage of the cheap loan interest rates and borrowing the money from the banks and invest the cash that I would have used to purchase the car outright.  The idea being that I should be able to make out better financially if I invest the $10,000 instead of paying off my car loan…

So, how is investing the money working out for me?

Well, so far between stock accumulation and dividends, I now have $4075 that I wouldn’t have had if I paid off the car balance outright with the cash!  Granted that I still have about 2 years left to pay on the car, I’m pretty happy with the progress that I’ve made so far!  By borrowing the money at a very low-interest rate, and keeping the money that I would have spent in a fairly safe stock, I should almost break even from a money outlay perspective by the time the loan terminates.

By break-even, I mean that the car didn’t cost me anything, or pretty darn close to nothing.  That’s almost like getting the car for free… almost!

So as happy as I am currently with my decision, who knows what the future will bring.  The stock market has been rallying for a long time now, and it might be getting ready to correct soon, who knows…  I’m in a pretty safe stock (utility based) and it does have a dividend so I should be good, but…

Let’s play “Worse Case Scenario” (one of my favorite what-if games).

What if the stock market does have a correction, or even go into bear mode?

My stock is a utility, so that means it won’t be going out of business just because of the nature of utility businesses (other than coal).  Along with a certain state of security, I highly doubt that the dividend will be in danger… After all, this company has never decreased its dividend payout and has a solid history of continually increasing it… even during the “Great Recession”.  If the dividend can survive the “Great Recession”, then whatever the next few years brings should be okay too!

I already WIN… (kind of)!

Just taking into account the dividend stream alone, the sum of the total cumulative dividends would equal the interest charges that I’ve incurred already with the borrowing of the money from the bank.  So in some ways, I’ve already ahead of the game.from a financial perspective assuming the stock valuation remain close to 10k (yes, I know, I know… there is still a small tax consequence but it’s trivial and will so be a non-element).

So yes Virginia, borrowing money and going into debt for this particular scenario should be a good financial move in this case!

Getting Smarter?

Not all debt is bad and sometimes debt is good…  sometimes it pays to crunch the numbers and take a fairly safe risk! 😉

Don

 

4 Responses to When Debt is a Good Thing

  1. Interesting strategy. Even better that you tracked it separately so you could see the outcome. I’ll have to think about whether I would do something like this down the road.