Quick Thanks for User Feedback
Last time I said I would talk about borrowing to invest and I’ll get to that in a second.
But first I want to thank Mark for letting us know about the problems we were having with the website. We really appreciate any feedback you want to give us.
Evidently some of the pages weren’t showing up in the dividend calendar data. So we got to work yesterday and redesigned the back end.
Our goal was to deliver on the NASA coined phrase “faster, better, cheaper”.
So we got faster by making the pages faster to load, and by getting the dividend data updated sooner after the close of the market (it should update around 6pm CST now, instead of 8pm CST as before).
We got better by making sure that we won’t have missing data pages any more.
But how could we get cheaper? I mean, the site is already free. We’d have to give you money to make it cheaper. But you gotta do what you gotta do. So watch for our offer to give you money later on in this post.
Borrowing to Invest
Last time I talked about the benefits of using borrowed money to invest in an inflationary environment. So now I’ll talk about where to borrow that money from.
When we’re talking about investing in stock, the first place that comes to mind is buying on margin. Generally you can borrow up to 50% of the value of the stock you want to buy. The interest rates aren’t terrible, but they aren’t great either. At this writing http://www.choicetrade.com/ has an 8.95% interest rate posted on their website, and http://www.interactivebrokers.com/ looks like its offering about 6.8%.
Although it’s available, I’ve never actually gone this route. I’ve always found cheaper sources of funds before I got down to margin.
The next cheapest place might be to borrow money against your car. If you read my earlier rant on expensive cars, you know that I don’t like to tie up money in my transportation. But if you already have the car and you’re not willing to just straight out sell it and buy a cheaper one, then this might be an option for you.
Bank of America seems to be offering as low as 7.6% on a used car for 60 months, and a local credit union is offering as low as 5.65%. These are lower amounts than trading on margin, but you have the added “invisible” expense of the car depreciating. But I already went over that in the rant, so I’ll stop picking at it.
You could always borrow against your home. Among the options would be to do a home equity loan, a refinance, or a line of credit. This might be cheaper than the previous two because it’s possible that the interest would be tax deductible (check with your accountant).
Staying with Bank of America from above, they are offering as low as 7.74%, which after taxes (assuming 25% tax bracket) is about 5.8%. By the way, I’m not recommending Bank of America, just using them as a reference. In fact I would actually recommend against them because they seem to be the highest cost in anything I’ve ever looked at them for. Anyway, jumping back to the credit union I see they are offering as low as 5.65%, which would be about 4.3% after taxes.
Of course this doesn’t take into account any costs to obtain the loans, so that might change the actual amount paid for the loan. But in this case you are most likely borrowing against an asset that will appreciate rather than depreciate (like the car). Unless that is you live in California or Florida where you’re likely to see your house value drop over the next few years due to the bubble deflating.
You could borrow from your 401k. Generally you can borrow up to 50% of the value of your account. The interest rate that I’ve seen for my 401k is 9.25%. That’s not too bad considering that I am paying the interest back to myself. The loan term is 60 months and the fees come to about $115 over the life of the loan. One other hitch is that if I lose my job for some reason, then I have to pay it back immediately or suffer a 10% penalty for early withdrawal. But the loan default doesn’t go on my credit report, so maybe that’s a “glass is half-full” kind of thing.
The down side here is that I am the one both lending and borrowing. So for our purposes of borrowing money in order to get ahead in an inflationary environment, at first glance, this doesn’t seem to do it.
However, we need to consider how that money got in there. Money in my 401k is growing tax deferred. That means that really I’m borrowing the taxes I would normally have paid to the government and using them for investment purposes until I have to pay them later when I make withdrawals. Thus this does meet our requirements of using other people’s money to invest.
A bonus is that by taking the loan, and paying it back with interest, you are actually able to deposit more money into your tax-deferred 401k than the annual limit. So you can have even more to borrow later and even more to grow tax-deferred.
Another point to make is that if you take a loss on an investment out side of your 401k then you can take a tax deduction for that loss. If you take a loss in your 401k, you can’t take a deduction. So you give your 401k a guaranteed return in the form of the interest you pay, and you make your riskier investments outside of the 401k where you can get the tax deduction. Not a bad deal really, but it could be even better I think.
This idea requires a little more planning than the others. You could change your withholding at work. This is the amount of money that they take out of your check to pay your taxes.
So basically you submit a new W-4 at work with no more than 10 deductions. If you do more than 10 then the company has to report it to the IRS. (Check with your HR person to make sure on this.) Then each of your paychecks will be higher by the amount of tax that you would normally have paid out to the IRS.
But you must pay a minimum amount through withholding by the end of the year. So near the end of the year, you’ll want to submit a new W-4 that increases your withholding. Make sure you do this when there are still enough paychecks and pay left in the year to cover the minimum amount that you need to pay.
The rule is that you must have paid at least 100% of your last year’s tax bill by the end of the year through withholding, or you will owe a penalty on your income taxes. There are other options, like paying 90% of this year’s tax bill, or owing less than $1000 at the end of the year, but paying 100% of last year’s tax bill is the safest in my opinion because you’re not estimating.
So here you are borrowing money from the IRS in the form of taxes that you normally pay. The interest rate (assuming you avoid the penalties correctly) is 0%, but the loan term is short. You start in January, probably stop in October, and you only get a small amount of the “loan” each month. Plus you have to do the switching around of the W-4s. Thus I would say this is an interesting possibility, but I would like to see it get even better.
This doesn’t really qualify as a loan, but it’s a place you can find some money, I recently heard about it, and tax time is coming up, so I’m throwing it in here.
That’s an article that talks about the refund of the excise tax credit that used to be paid on long distance phone bills. It doesn’t appear on local phone bills, but it does appear on cell phone bills. After looking back at some of my bill history, it turns out I paid $2/month in excise taxes on my cell phone. Over 42 months that comes to approximately $84, which is higher than the $30 they are offering as default. Since this is a credit, that’s $54 that will go right in my pocket, or rather into my investment account.
Stock options aren’t exactly a traditional loan as we have been discussing, but they do represent borrowing someone else’s purchasing power. An option allows you to control more stock than you would other wise be able to with the same amount of money. So it does work for our purposes of borrowing to invest. The “interest” is paid through the premium in the option when you buy it.
The last idea I have is to use credit cards. Now you could use the ones that have a 39% interest rate on cash advances, but I’d probably recommend against that. Instead, I’d say to pick up one of the 0% cards.
A while back we were offering a report on how to make $40/month. We laid out specific instructions for borrowing from a credit card and depositing the money in a secure investment. We also pointed out all the land mines in this process, how to avoid them, and how to make it dead simple without any management headaches. The hardest part is sitting back collecting the earnings each month.
At the time, we could only offer a 90 day money back guarantee because that’s as much as PayPal allows. But we really wanted to offer a never-ending guarantee because we don’t believe you should pay for something that doesn’t give you value or that you don’t want.
So here goes. Email us at firstname.lastname@example.org to request the report. We will reply with the report as an attachment. Then we will check back with you in a few months. We have been doing this for years now, so we know it works. If you decide to follow our lead and do it too, we’d appreciate if you would buy the report retroactively. If you decide not to, then that’s your prerogative and it obviously wasn’t a value to you. (Update: click here to download the report)
(So there, now the site is cheaper too. Our goal of “faster, better, cheaper” has been realized.)
In any case, let’s say you use the report and start an income of around $40/month. After 12 months, you’ll have $480. It’s a guaranteed return. So that means you can take $480 of the credit card money now and invest it knowing that you will have $480 in 12 months to pay it back with assuming you lose it. If you don’t lose the $480, you’ll have it and the $480 you make from the credit card report.
Since this is basically “found money”, you might consider leveraging it even further by using it to buy long term options on Wal-Mart as we discussed in the previous post.
So there’s my pitch. Use the report to start an income, use the income to pay off a very small loan, use the small loan to buy options. So we have no downside and the possibility of a nice upside. That’s my kind of investment.
I really like this theme of investments that have no downside and all upside, so I’ll be talking some more about these kinds of investments next time along with why I like them so much.