A week ago, it was payday. But not just any ordinary payday, the big one! My year-end bonus was deposited in my bank account. The product of a long and hard year where I truly earned each dollar. Why do I do that? I’ll tell you here; it’s my little secret ;-). I’m not the kind of guy who wants to win contests (been there, done that), not the guy who wants to tell all his colleagues he’s the best and not the guy who’s looking for my boss’ appreciation. I’m simply the kind of guy who works hard to earn a big fat check at the end of the year.
I won’t disclose my real bonus, the title is completely phoney and not the point of my article anyways. The point is; what would you do with a lump sum deposited in your account? Tax season is approaching and you might want to ask this question for a smaller amount anyway. I didn’t always spend my money wisely or the way I should have done it. In fact, many of my bonuses were used to treat myself (like going to Hawaii last year with my wife!). But this year, I’ve tried to make sound decisions.
The Eternal Question; Pay Your Debt or Invest?
My first thought was to make a huge contribution to my TFSA and invest this money in the stock market. After all, I could easily create a 4% dividend yield portfolio right now with the recent volatility. On the other hand, I still have a couple of loans that I’ve carried for the past two years. One was used to install a central AC in my house and the second one was for the pool. You can tell, these were priorities back then ;-). The first point to settle when you are wondering if you should pay down your debt or invest is how much interest you pay vs how much return you can expect. Considering this rule, I should have invested the money in my TFSA since my expected return is greater than the loan interest.
However, I’ve decided to pay both loans and clean my balance sheet of consumer debts. The second point is to consider your current financial goals; do you wish to decrease your monthly payments or increase your balance sheet. Right now, I’m in the middle of my 18 month countdown before I retire and go live in an RV for a year. I don’t want to have any loans hanging over my head during that period. This is why I’ve decided to pay off my debts.
I now have three debts; my car loan, my RV loan and my mortgage. My car loan will be paid off by selling my car in 2016 and my mortgage along with my RV loan will also be cleared by selling my house. If I’m lucky, I’ll even have about 50K in cash once I become “debt free”. That’s a pretty solid plan since I expect to spend roughly $2,000 per month in my RV, this means I can easily live 12 months without even trying to make a penny with my websites…
Crazy Idea: Invest in a Margin Account
While I think I’ve made the right and foremost conservative decision, I’ve also looked at the possibility of taking my money in a margin account to almost double my investment. But I’ve made the following calculation to see if it was worth it:
Assume an investment of $10,000 with a margin at 70%. If I want to give myself some room for volatility, I can’t invest more than $30,000 (9K cash + 21K from the margin) and leave 1K in cash to cover for a potential margin call. So what can I do with 30K? Let’s say I do the best case scenario possible and make 20% return on it. This means I make $6,000 in a single year. That’s pretty amazing when you think about it in term of return (that means a 67% return on my initial investment of $9,000). But does it really change my life for a year considering all the risks taken?
I’ve leveraged several times in my life and it almost always paid off. However, with three kids and a financial future that is uncertain, I would rather play it safe this time. I might want to do it when I leave with my RV as I will live from my websites and investments, but for now, I would still rather pay off all my debts. I will keep the idea of leveraging with a margin account for next year, what do you think? Have you ever traded on margin?
Great article, I love these kind of mind exercises. For me the answer would be simple: First pay off debt (unless it is some kind of 1% student loan) and put the rest in dividend stocks.
I used to keep my debt and invest the full amount, but this time is a bit different. I agree that paying down debts is probably the safest move when you receive additional money. I must tell you that I feel better now that my consumers debts are gone!
That’s a tough call, honestly – speaking as someone without a TON of debt (not going to act like I don’t have ANY 😉 ) I might consider some margin trading. If there was something I was keeping my eye on that was looking hot, I think it might be worth jumping into some margins just to make sure you can get in on it in time.
Of course, since margin trading could really be considered another form of debt…it’s better to be careful if you still have some outstanding debts.
So long as your income is strong, your emergency fund is in good standing, and your debts are low interest rates (like most mortgages are now) I certainly keep pumping cash in to my investments
Hey Elijah, Adam,
I just can’t wait for next year’s bonus. This will be going in a margin account 😀 hehehe!
At this point in my life it’s an easy answer. I’d invest 100% of it in dividend stocks. I have zero debt. Live in apartment (not looking to buy home), own my car, etc. Have a year of living expenses in an ’emergency’ account. I’d break up that $10k into three dividend investments done over three months.
Paying down debt is the correct answer for me. Sleeping better at night leads to better decision making. And it is a lot easier to sleep when you have no debt.
Hey Dividend Dreams,
I actually sleep very well at night even with debts. I beleive in my ability to earn a substantial income for several years ahead. Therefore, having debts is not a problem.Still, paying debt was a great feeling!
wow! that’s pretty sweet! at one point, you’ll have to figure what you will do with all that money 🙂 Hahaha!