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blesto (31.95)

I Almost Blew It

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November 22, 2011 – Comments (11)

Hi!

I might be considered one of the people that fall into the bottom 20% in the US economy. Over the years I've been fiscally prudent with my meager income and I've got one helluva good credit score. (I mean excellent good.) My mortgage is paid off, I never had a cable bill (It's against my religion, but that's another story) and I always seem able to put a little something into my brokerage account on a regular basis.

I figure that by the time I retire I will have worked myself up to the top of the bottom 40-50%  of the US economy. Mostly this will be due to the knowledge I've gained here at the Fool.

I got the usual credit cards, one of them being my VISA. I like my VISA and I have a more than a good credit limit by most standards on the card IMHO. They (VISA or more appropriately the issuing bank) unexpectedly sent me a small series of checks that I can use that would be put on my card account. The big thing is my discount brokerage would accept them!  I was thinking OMG I could put a pretty penny into my brokerage account and take advantage of these market swings! 

I almost did it. I was in my car with the check in hand on my way to my friendly neighborhood discount brokerage office. I almost deviated from my strict plan of only putting funds I already have and don't need immediately into my brokerage account and pooling it with my dividend returns. This gives me about 4 windows of investing time during the year.  My windows have been getting larger over time due to more dividends being more spread out. But I digress.

I almost violated one of the Foolish tennants to never invest with debt. It might not have seemed like much to some, but it would've been leveraging just the same.

Most everyone here knows that Buffett says, "It takes a life time to build a good reputation and only 5 minutes to destroy it."  The same thing can be said for your credit rating. 

When you have good credit many things are just easier in this economy, especially if you use it responsibly. So I refrained from what I now perceive as being irresponsible with my credit. I'm writing this now to reinforce this responsibility to myself, cuz the temptation is still there.

I may never be a Billionaire, but I know I will be Foolishly comfortable. 

blesto

11 Comments – Post Your Own

#1) On November 22, 2011 at 6:42 PM, dwot (99.56) wrote:

I don't think of the bottom 20% as having paid off their mortgage.

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#2) On November 22, 2011 at 6:56 PM, walt373 (99.85) wrote:

Good job. It doesn't make sense to use credit card debt to invest, since the interest rate on the credit card is so much higher than a rate of return you could reasonably earn on investments in an average year. If you do want to use debt for investing, it's much easier and cheaper to just get a margin account at your brokerage. Interactive Brokers charges something ridiculous like under 2% a year for margin interest. Compare this with 20%+ on credit cards and it's a no-brainer. Of course, just staying away from leverage altogether is probably the best choice.

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#3) On November 22, 2011 at 7:10 PM, blesto (31.95) wrote:

Nice to see you dwot! 

Yeah, it does sound a little weird but it's true. I had a 30 year mortgage that I paid in 21 years. It's been several years now. It's not a McMansion or anything, but it's mine.

I think I might rank higher in the amount people have saved, but as for where I rank in current income I'm in that lower 20%. Well maybe you could squeeze me up to the lower 30%. 

I endeavor to live within my means and with no complaints.

I watched as many of my friends and neighbors flipped into bigger and more expensive mortgages several times. And I know more than a few of them are regretting it now. I was literally ridiculed by some of them in the earlier years for not flipping up like them. They were so sure it was a no lose proposition.

My place is not so big, but I like it and it's mine. Now I only owe taxes and insurance.

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#4) On November 22, 2011 at 7:14 PM, blesto (31.95) wrote:

Thanks walt373!

I've thought about margin accounts and decided to steer clear of that too.

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#5) On November 22, 2011 at 9:34 PM, rofgile (98.98) wrote:

blesto,

 I second dwot's post.  If you have paid off your mortgage, you have significant assets.  That is excellent - and congratulations.  

 To be in the bottom 20% of families, your net wealth (assets - debts) would have to be about $7500.

  -Rof

(I've been feeling a lot less wealthy over the past year, as my portfolio has taken a bit hit this year with a couple of bad choices.) 

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#6) On November 22, 2011 at 9:58 PM, blesto (31.95) wrote:

rofgile

I've seen different descriptions of values and percentages but I'm definately more than $7500 ha, ha, ha! Thank God.

Check this poster out. Click on it to enlarge.

http://xkcd.com/980/

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#7) On November 23, 2011 at 1:54 AM, SultanOfSwing (99.60) wrote:

blesto,

Fascinating poster.  It seems to me one way out of this debt mess would be to tax the derivatives market for fractions of pennies on the dollar.

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#8) On November 23, 2011 at 6:13 AM, dbjella (< 20) wrote:

It seems to me one way out of this debt mess would be to tax the derivatives market for fractions of pennies on the dollar.

Wouldn't you think they would find a way to spend that money and we would be in the same boat? 

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#9) On November 23, 2011 at 8:12 AM, SultanOfSwing (99.60) wrote:

Yeah you're probably right.  We just need to throw da bums out.  But that's a whole other blog....

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#10) On November 23, 2011 at 10:02 AM, Schmacko (92.08) wrote:

#2) "Good job. It doesn't make sense to use credit card debt to invest, since the interest rate on the credit card is so much higher than a rate of return you could reasonably earn on investments in an average year. If you do want to use debt for investing, it's much easier and cheaper to just get a margin account at your brokerage. Interactive Brokers charges something ridiculous like under 2% a year for margin interest. Compare this with 20%+ on credit cards and it's a no-brainer. Of course, just staying away from leverage altogether is probably the best choice."

It's not really putting it on your credit card like you say.  Back in 2007 Discover used to send me blank checks for up to $10,000 with 0% apr for the 1st year.  This is back when the market was still basically just doing nothing but go up.  I seriously considered, on multiple occasions, throwing that 10k in my brokerage account, where it would hopefully grow, and then paying the loan back in a year before the real interest rate kicked in. 

I think in retrospect I would've been fine investing on that leverage, at that point in time, but a piece of my brain kept telling me that it was probably too good to be true and that the market would eventually turn.  If someone had leveraged up in 2008 thinking to mkae easy money off the market they probably put themselves in a much worse position. 

Discover still sends me those checks but the one-year teaser rate is no longer 0%, so it is much easier to just rip em up now.

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#11) On November 28, 2011 at 8:40 PM, HarryCarysGhost (99.79) wrote:

Now why'd you go and tell me I could use those checks to invest with, I'll have to start placing my bets on Mr Markets wild gyrations.I should be able to beat 9.5% pr mnth right

Seriously what could possibly go wrong. (J.K :).

On Margin- there was a time I was seriously considering it. I wanted to buy mmm when it hit $50 during the crash. That would have worked out for me but since then I had a few terrible investments most notably in 2010 with some Chinese RTO's.

I can't help but think that if I had a margin account I would've put much more money on them, rather then just losing a few hundred bucks. And worse yet, being forced to sell my low cost basis stocks, that I bought for long-term.

Much more comfortable DCA'ing and Dripping from now on.

I'm glad you made the right call.

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