Smart Debt Strategies
for a Secure
Financial Future

Use Debt to Advance Your Future

Using debt to advance your future is a powerful concept, yet one that should be approached in a mature way.

For over 25 years, our clients have been strategically using their home equity to help finance their future. Whether it’s starting a business, buying an investment property, renovating your home or your own personal goals, it’s important to carefully consider your timelines and its impact to understand how to use debt to your advantage.

Before you incur debt for anything, you need to ask yourself the following hard questions:

Is it worth it for me to finance this to acquire it sooner rather than later?
Can I pay the debt off in a reasonable amount of time?

Is Acquiring Debt Sooner Really Better?

There can be advantages of acquiring debt, again, it depends on your personal timelines and your ability to pay it back in a reasonable time. Then, when is the right time?

Let’s consider these examples:

Starting or buying a business  
Often the opportunity may be right at a specific time. The income from the business will generate enough revenue to pay off the loan, with interest, and then some. If you wait, the opportunity may be gone. In this case, sooner is better.
Capital Direct Tip
Buying an income property
If you plan to buy a property that produces rental income, the sooner you buy, the more income you will get. Therefore, sooner is better.
Capital Direct Tip
Financing an education
In today's global economy, education is becoming a requirement not an option. If you have the opportunity to go back to school and upskill, the sooner you do it, the sooner you will enjoy the higher income. Sooner pays off in this scenario.
Capital Direct Tip

How to use Debt – Examples

If you are spending money to acquire something that moves you ahead towards an important goal, then sooner may be better. These situations usually fall into a few categories:

Taking on debt isn’t necessarily a bad thing. In some cases, it can be used to invest in yourself, build your skills and grow your potential income. Some examples include starting or buying into a business or franchise, buying an income property or financing an education and/or upskilling. These situations can produce a higher source of income for yourself in the long run.

If you are confident that the expenditure will bring in more than enough income to cover the loan, incurring debt for this purpose may be just right.

If you are using the money to start or buy into a business or to buy equities, the interest on the loan may be tax-deductible.

Here's how that works. Let's say you are in a 40% tax bracket meaning that for every dollar you earn, you pay 40% in income taxes. Additionally, let's say you are paying off a loan at $1000 per month. In the first year you would pay $3942.99 in interest on the loan. Because the loan is a business expense, you receive 40% of that amount or a $1577.20 tax return. This tax break is equivalent to a significantly lower interest rate.

This tax advantage could apply to:
  • A business that you started or bought into.
  • Renovating your house to create a rental apartment.
  • Buying a rental property.
  • An equity investment in a Canadian company.

When considering the tax implications of an investment, you should always consult a certified accountant or your financial advisor.

Making money isn't just about cash. If you are acquiring property that holds or appreciates in value, you are increasing your net worth. Therefore, the cost of the loan may be justified.

Here are some examples:
  • Renovating your home
    With a growing family, you may not have the cash to do the renovations when your need for space is greatest. If you wait you will lose the opportunity to raise your family in your dream home. As well renovating increases the value of your home giving you better options for future financial decisions.

  • Buying a vacation property
    In many parts of Canada, real estate prices in cottage regions are soaring. Buying now gives your family the benefits, and the financing cost may be lower than what you would pay if you wait and buy at a higher price.

At times, you may want to go into debt for something really important to you that does not provide a financial return.

This needs to be approached with more caution, because unlike wealth-generating investments, there is no financial "safety net" here to protect you.

Life is more than just about investment property it’s about sharing those key moments with the people you care about. Whether your goals are financial or personal, the equity in your home can give you the financial flexibility to show up for those big moments in life.

Here are some common examples.
  • Financing a wedding
    If your son or daughter is getting married, this is a once-in-a-life- time event. You may want to give your child the best you can afford, which will pay you back in memories for years to come.

  • Financing a "once in a lifetime" vacation
    If it’s a special wedding anniversary, you might want to take a long-deserved vacation. Many financially responsible individuals take extended trips with their families before the kids grow up.

If you've looked carefully at your expenditure, and have firmly decided that it really is worth going into debt for, you need to ask the next big question - can I pay this off in a reasonable timeframe?

The best way to determine this is to take a serious look at your household budget. If you don't have one, this is a good time to start. Going into debt means making a serious commitment to monthly payments. This makes it urgent that you can stick to a consistent spending plan month after month.

The Sanity Cheque: Paying off a debt is easy to ignore because it is "out of sight and out of mind." To see how it will feel to actually make the payments, try this simple exercise. Assume you are considering a loan that will require payments of $1000 per month. Take a cheque from your chequebook, and write out a cheque for a loan payment, with a date and month in the future. Pin the cheque on your bulletin board for a few days. How does it feel to look at that cheque? If it makes you feel uncomfortable, maybe you should think twice about taking out that loan.

How to make a debt repayment plan:
  • Calculate your total monthly after-tax or "net" income.
  • Establish a reasonable monthly amount that you'd like to save for the future.
  • Tally up all your fixed expenses. This includes mortgage, hydro, car payments, transportation, home maintenance, etc.
  • Estimate regular weekly expenses, such as groceries. Multiply by 4.3 to convert to a monthly figure.
  • Add annual requirements such as clothes, equipment, etc., and divide by 12 to get a monthly amount.
  • Allocate money for vacations, holidays, kids' summer camp, or other seasonal requirements, and divide by 12 so you can save for them.
  • Add in memberships, subscriptions and other regular expenses.
  • Come up with a reasonable number for discretionary spending.

Finally, add up all your monthly expenses. The total needs to be less than your monthly income, with a big enough margin to pay off your loan. You may need to consult an amortization table or online calculator to see what kind of payments you are looking at, but here are some examples, calculated at a 10% interest rate:

Purpose of Loan Loan Amount Monthly Payment Time to Pay
(Months)
Home Renovations $50,000 $1,000 65
Vacation Property $150,000 $2,500 84
Business Start-up $75,000 $1,500 65
Wedding $25,000 $400 89

If your monthly expenses are too high to allow for loan payments based on your monthly income, proceed with caution! If you can't show where the money is going to come from on paper, it's probably not going to work out in reality. Be ruthless in cutting your expenses, but don't kid yourself that the money is going to come out of nowhere. Re-work your budget until you are really comfortable, or reconsider your plan.

* Web site content is for informational or illustrative purposes only and is not be considered or used as a substitute for professional financial advice from an accountant, lawyer or certified financial planner. Click here to view our full legal disclaimer.

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