My mother in her infinite wisdom always detested debt, personal debt, and lending money to others - likely afraid she would never be repaid. While the new generation of Canadians, and many of the baby boomers, whom I'm 5 years removed from as a 67' baby, have used debt to accumulate wealth and real estate. Being an "owner and not a loaner" is a good strategy in my opinion, and even if debt is used to accumulate assets that will seemingly appreciate beyond the cost of borrowing makes sense - so long as the debt is manageable, and that's IF with a capital I and F. Keep a close eye on your cash flow to support any debt you take on.
Being an owner implies accumulating solid assets like blue-chip dividend stocks, and real estate for the long term. So long as one has a sound strategy, and the professional help to manage both assets, being an owner is a good long term strategy.
On the other hand, being a loaner or making loans is equivalent to buying GIC's, Fixed Income, and investing in Mortgages. While all of these options seem less risky, I view them as riskier over time. These are all loans. Why could GIC's, Bonds/Fixed Income, where you "loan your money" rather than "own an asset" be riskier over time?
Many reasons. Namely, inflation! Inflation is taking a big bite out of these assets. In the 1950's if you possessed $100 USD, that could be worth less than $10 dollars now. On the other hand, if you invested that same $100 USD into blue chip dividend paying world-class companies and Real Estate, which is often less liquid, you and your family certainly would have more than $100 now, right?
Secondly, taxes. Loaning money or investing into GIC's/Bonds and Mortgages have some of the highest tax rates in CDA. Loaners receive interest income, and interest income is egregiously taxed in Canada. On the other hand, Capital Gains and Dividends from those same blue-chip world-class companies are taxed considerably lower, while real estate possesses capital gain potential also, and the net rental income while fully taxable, often has some expenses to offset some of that tax burden.
In summary, in deciding upon you and your family's best long term financial future, choose mostly to be an owner, and not a loaner.
Individual circumstances and risk appetite of course need to be considered.
Please call or email me for more insight into being a good owner, I've become somewhat of an expert at both owning and loaning.
Thank you,
Lee A. Schaffer, PFP® CIM® FCSI®
Vice-President & Portfolio Manager
Schaffer Wealth Management of RBC DS Inc
http://www.schafferwealthmanagement.com/
Private Wealth Management | RBC Dominion Securities Inc.
260 East Beaver Creek Rd., Suite 500 | Richmond Hill, ON L4B 3M3 | Tel: 905-764-5013 |e-mail: lee.schaffer@rbc.com