INDUSTRY INSIGHT
WEALTH MANAGEMENT
SPONSORED CONTENT
IF YOU’RE GOING
TO BORROW ,
DO IT WISELY
Provided by RBC Wealth Management and Eric A. Gregory, CFP®
A
s individuals, we are now borrowing more than ever. Is this good
news or bad news? And just as importantly, from your point of
view: Are you borrowing wisely?
Let’s start with the first question. Americans have now borrowed more
money than they had right before the Great Recession began in 2008.
Total household debt in the United States reached a new high of $12.7
trillion in the first three months of 2017, according to the Federal Reserve
Bank of New York.
At first glance, this looks like it could be trouble — after all, too much
debt is bad, right? But, as is true with many issues in the financial world,
the total picture is more complex than a simple good/bad analysis. On
one hand, it’s certainly true that individuals need to control their debts.
The higher your monthly debt payments, the less money you have to save
and invest for the future. Plus, if you face a towering debt burden, you
could really be pinched if something should happen to your income, such
as a layoff or a temporary disability.
On the other hand, a high national debt level can also indicate that
Americans are more confident about their financial futures, and are
expressing this confidence through purchases of homes, cars and other
consumer goods. So, if you think your prospects are rising, you may see
your debt level increasing along with it.
Ultimately, of course, you will know if your debt payments are
becoming unmanageable. But you should do everything in your power to
avoid getting to that point. Try to live within your means, avoid “impulse”
spending and stick to a budget. Following these behaviors will take
discipline and patience, but it will be
worth the effort.
Trying to keep debt manageable,
however, is not the same as viewing it
as somehow “evil.” Instead, try to look at
debt as a useful tool, one of many in your
financial “toolkit” that also includes your
savings and checking accounts, your
retirement accounts—such as your IRA
and 401(k) or other employer-sponsored
plan—and those investments held
outside your retirement plans. And like
all these other financial tools, debt must be used wisely to help you make
progress toward your goals.
For example, suppose you want to purchase a vacation home—one
that you can rent out when you’re not there, providing you with extra
money to supplement your retirement income. Unless you have an
extremely large amount of cash available to buy the home outright, you
will need to borrow. You could simply go to your local bank to take out a
loan, although it probably wouldn’t be so “simple” given the credit checks,
approval requirements and possibly lengthy processing times involved.
Plus, conventional bank loans can be expensive, carrying relatively high
interest rates and other fees.
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As an alternative, you may want to consider looking at the financial
assets you already have to see how they can help you finance your
vacation home. You could just sell some of your investments, but you
might incur substantial taxes. Perhaps more importantly, though,
you’d be depleting your portfolio of resources you were earmarking for
retirement or other long-term goals.
Instead of liquidating these investments, you could use them in
a securities-based lending plan. Securities-based lending can take
different forms. In one method, you would sign a “margin” agreement
on your brokerage account, which gives you quick access to cash, up
to the permitted value—typically 50% of the total purchase price—of
your marginable securities. (Many stocks, bonds and mutual funds are
considered “marginable,” as long as they meet certain requirements.) And
as long as your minimum equity requirements are maintained, you will
not have to establish a fixed term or repayment schedule. (Keep in mind,
though, that if you fall below the equity requirements, you may have
to deposit additional cash or securities to bring your account up to the
minimum level.)
You might also be able to use your marginable securities to establish a
revolving line of credit. This type of credit line might not charge a setup
fee and usually offers an attractive borrowing rate and flexible repayment
options.
Many investors have used these credit solutions to gain the liquidity
they need without disrupting their long-term investment strategy. So,
give these ideas some thought when you need to borrow. They’re good
examples of “smart” debt.
This article is provided by RBC Wealth Management for Eric A. Gregory, CFP®, a Financial
Advisor at RBC Wealth Management, and may not be exclusive to this publication.
The information included in this article is not intended to be used as the primary
basis for making investment decisions. RBC Wealth Management does not endorse
this organization or publication. Consult your investment professional for additional
information and guidance.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC