Posts Tagged "bg"
Leverage Part 2: The Dark Side!
So now that you are all hot and bothered about getting an investment loan (aka leverage), let me take you down a notch! (Trust me, it’s for your own good…) :) Okay, so let’s now say that Greg, who if you remember had learned that he would be $2,000 ahead by getting a loan, decides to calculate a few “what-if” scenarios… 1. What if the investment only earns 6%? In this case, the investment’s rate of return and the interest on the loan are equal. How much does Greg have at the end of 10 years? In this case the leverage will leave him with just $13,487 at the end of the 10 years. If he had made the annual savings of $1,000 into...
Read MoreLeverage Part 1: What is Leverage?
Leverage: Think of it as using “other people’s money” to make money more quickly. Probably another topic that is best explained with an example. Greg has $1,000 a year to invest for 10 years. Assuming a rate of return of 10%, at the end of 10 years he will have $17,531. BUT, we know from the post on the magic of compound growth that TIME has a large effect on growth. The philosophy is that if you could instead take all that $10,000 over 10 years and just put it in now, you will have more money than by putting it in over 10 years. Okay, let’s look at a simple use of leverage: Greg only has $1,000/year, so he can afford a loan payment of...
Read MoreWhat is a GIC?
GIC: Guaranteed Investment Certificate. In the US these are known as CD’s (Certificate of Deposit). This is pretty much as safe as you can get when it comes to investing. You buy a GIC at an advertised rate (say 4% as an example) and you earn 4% per year for the duration of the term. They are guaranteed in that it doesn’t matter what happens to the stock markets, or with interest rates after you buy the GIC, if you bought a 4% GIC, you get 4% annualized for the duration of the term you chose. (Term is just a fancy word for how long you want to hold this investment.) The only way you could lose out is if the bank went under – even then, your money is...
Read MoreUse our strong dollar to save on online purchases…
Our dollar has been hovering around $0.95 USD. So to figure out how much you pay for something that is listed in US funds, just divide the US price by 0.95. Now you have how much you will pay in Canadian funds. To take advantage of this you need to know that the price spread of an item (the difference between how much it costs in US funds and how much it costs in Canadian funds) is greater than the price spread between the loonie and the US dollar. (The price spread between the loonie and the US dollar is 5 cents divided by 100 cents). <– THAT’s the philosophy, but what you really need to know is that when you divide the US priced item by the...
Read MoreWhat is "Diversification"? There is more to it than you might think!
Diversification basically means not putting all your eggs in one basket. If you hold only one stock and that company went bankrupt, then you would have lost all your money. If you hold two stocks and one company goes bankrupt you have only lost half your money. And so on, and so on. But there is a BIT more to it than just that. If you held two stocks in companies like Sprint and Verizon and someone invents a device that makes phones obsolete, then both companies might go under. In this case you have diversified by holding two companies, but you picked two companies in the same industry! Further, if you held two mutual funds that both invested in large Canadian...
Read MoreInterest: Think of it as "rent"
I don’t think many people explain it this way, but it is probably the best analogy I’ve heard. Rent is paying for the “use” of something: like renting a movie, an apartment or house or a car. You never own the item, but you get to enjoy the use of it for a specified period of time. Interest in the financial world is exactly the same thing, except you are renting money! If you go back to the post that talks about how banks make money on your savings account, you’ll remember that they give you interest, but take your money and give it out in the form of a mortgage at a higher rate of interest. So they are “renting” the use...
Read MoreWhat is a "Line of Credit"?
A Line of Credit is basically like a credit card in that you apply to have the ability to borrow money whenever you want and have a set limit that you are authorized to use (let’s use $10,000 as an example). The Line of Credit remains open even when your balance is $0 – and you have no payments to make. If you were to use $5,000 then you would start to be charged interest. You could pay back the $5,000 right away or you could pay it back over time, the only thing you have to make certain is that you pay the interest monthly. So if your line of credit had a 10% interest rate you would owe a minimum of ($5,000 x 10% / 12) = $41.67 per month. You could...
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