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How Debt Can Save You Money

With a title like “How debt can save you money”, it sounds like I’m very confused, huh.  But read my story because it’s based my “real” life experience with a financial experiment that I’ve been living, for the past three years.  So this is not theory, this is my real story!

Back in December of 2012, I decided to give up my revered status of being “totally debt free” by going out and buying a car using an auto loan instead of buying the car outright.

toyota camry 2010

I didn’t need to do this, I had the money, but I preferred to invest the money into a stodgy (but what I considered “safe”) utility stock, which was obviously and luckily not a fossil fuel based company..

Well, I’m happy to report that on 1/28/2016, my investment vs “pay off the car outright” experiment has conquered a major milestone!  This huge milestone is that the value of my investment has now appreciated to double the cost that what I would have paid outright for the car!  This means that the capital appreciation in the stock is now greater than the initial cash outlay to buy the car outright, this includes the loan interest that I would have paid the bank that I took out the car loan. The feeling this instills beats the hell out of Christmas morning 2015!!

And the kicker is that I till have about 1 year left on the loan, so potentially the total gain could be even greater considering that the stock market has been less than stellar lately.

This was my first and most important milestone to cross, but there is a 2nd goal I have too.  While I consider my financial experiment a success to a huge degree, a secondary goal that I have is to develop a dividend income stream that could cover the monthly payments for upcoming future car purchases, especially the first car purchases for both of my kids.

This secondary goal is obtainable too with ideally, some smart planning but with some sacrifice and perhaps some small readjustments.

Current financial concerns spinning in my head:

  • The current dividend yield only would cover about a quarter of the yearly cost of a “used” but decent car for my 1st child.
  • I might need to reinvest my money into a new “still safe, but higher yielding” stock since my current stock investment doesn’t have enough of a dividend yield and there are some extremely attractive, higher yielding stocks in this currently down stock market.
  • For my kids, I might have to purchase cars of a good make and model that are older than five years old.  I’m thinking maybe a Honda Accord, or even that I’ll pass down my Toyota Camry.  Passing down the Camry is a post for another day though, but it is definitely a consideration.
  • There may be an overlap in my car purchases for the kids that I might have to financially alter my plans slightly.

I could go on listing concerns for a while, but doing so cheapens my win from this financial experiment, so I’m cutting it short.

The main takeaways from my multi-year financial experiment are the following…

  1. Three years and 1 month later from the start, the 10k loan I borrowed is now basically free.  It’s my break-even point also called the crossover point!
  2. Through some smart and lucky planning, my dividend-reinvesting stock investment has gained over 100% in capital appreciation.  In fact, on 1/28/2016, I was $333 dollars over my $10,000 “crossover” point, and as of 1/31/2016.  Yes, I got lucky with this experiment in that I recapped my investment so quickly, but even if it took longer, I think it was a good idea in the 2012-2013 stock market with such low borrowing rates.  If the market conditions was different back in 2012-2013, I might not have made the plunge though.
  3. Sometimes if the market is right, it makes more sense to invest you money instead of buying things outright with it.
  4. Another “sometimes” statement is that sometimes low-risk, reasonable debt can save you money if you have an equally compelling financial opportunity, as I had in this case.

So the past few days, I’ve been doing the happy dance…

I hope you enjoyed my “real life” example of how debt can save (or even make) you money!

Here is to a hopefully better “rest of the new year”!


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