Dr. Garth

Is the Doctor peeved that every dime in cap gains inside his medical professional corporation will soon be Chrystia-hoovered at 66%? Hmm. Let’s just say if she ever comes in for a check-up the stethoscope will be extra icy-cold.

By the way, did we mention the GreaterFool Crawl-in Medical Clinic & Vet Centre will be moving to Buffalo? Seriously. Turn left at Trader’s Joe’s. Don’t tell the CRA.

Well, Nurse Jiggles, wassup?

It’s Barry, asking about yesterday’s post. “In it you mentioned ‘debt’ is the enemy, so my question is: Is debt incurred to start a business considered good debt?

The reason I am asking is, I know business loans are in the 9-10% interest range. Due to this, I am wondering if it is more prudent to start a business by borrowing the funds or using my own capital.

Solid question. Simple answer. Never use your own capital unless absolutely nobody will give you some. The interest rate is somewhat irrelevant since 100% of financing costs are deductible from taxable income. If your enterprise is a success, you’ll probably want all the legit deductions you can get. Conversely, if the thing withers and dies you will probably be able to wiggle out of some or all of the borrowing through negotiation or bankruptcy. But if you use your own savings then, poof, all gone. And no useful write-off.

Just don’t personally guarantee the loan. That’s what Moms are for.

Here’s Alex, 35, living and squirrelling away with his squeeze in Vancouver. “I’ve been actively managing both of our portfolios over the past 10 years or so through an online investment platform,” he says. “All investments are in a reasonably aggressive but diversified ETF portfolio which I try to rebalance as best I can whenever one ETF gets low.”

To date we have almost $700k and I’ve never really thought about moving our funds to an actual wealth advisor as they come at a cost, whereas right now I’ve been happy to manage it myself as it’s not much work and the returns have been solid. I’m wondering at what valuation (if any), you think it’s better to put the money into a wealth advisor’s hands to manage? Is there a significant benefit to doing so that I’m not considering? If we keep going at the rate we’re saving, while earning the same ROI, don’t buy a house etc. we could easily have a couple of million in 10 years.

If you’re happy to do what you’re doing (and don’t become a doctor with a corporation and a Chrystia complex), then carry on doing it. But understand you also have a family and a job, no formal financial training, and are leaving your fortune in the hands of an amateur (you). It’s starting to be serious money, so having a full-time professional might be worth the 1% annual fee. (Remember that for a non-reg accounts it’s tax-deductible. Also over a $1 million household total, the fee should reduce.)

Two key points: tax mitigation and long-term planning. Those are things a pro can help you with that are probably equal in importance (at least) to whether you make 5% or 8% or whatever, annually. Tax policies are constantly changing, as are CRA interpretations and enforcements. As you build liquid wealth into the seven figures, you become a target. As for planning, it’s good to know decades in advance what retirement’s going to look like. Can you/should you get into a house? What will the consequences be? Do you need insurance? Why and how much? What kind? Do you want to leave an estate and, if so, in what form to cut tax and accomplish goals?

Normally full lifetime financial planning help comes free with managing a portfolio. And less stress. A lot less.

Okay, Chris is here, with a tender MSU. “Your blog postings have changed my family’s life, and I find it remarkable that you post such invaluable advice for FREE (and on a daily basis no less!). I also feel humbled that you spent time out of your day a couple years back to speak with me on the phone regarding investment advice (unlikely you remember).”

Sweet. But, he says (there’s always a but), “I’m now in dreadful need of additional investment advice.”

We’ve outgrown our Toronto 1-bed apartment given our aging children. Saving and investing for 10 years following your advice on a single-income white-collar job has been challenging but rewarding– starting from $0, we’ve amassed about $500k in a registered account portfolio. I’ve also hustled to increase my income from $55k to $150k-$200k in order to try and maintain pace with house price growth to eventually have a sizable down-payment. We now also have $500k in cash with my wife feeling we’re in a position to buy. But plunking down $400k-$500k on a house in the GTA to still be left with a sizable mortgage & monthly household costs makes my stomach turn.

I’m trying to convince her that the $500k be invested in a non-registered account with the monthly returns subsidizing or paying our rent on a house. But what’s the best approach in doing this, in terms of asset allocation? Can I just freely invest in the same diversified ETFs that my RRSP holds to get the same return, or are there tax implications when in a non-registered account? Should we decide to buy, are there any considerations (other than opportunity cost) of closing out the non-registered portfolio to then be used as a down-payment? Broad questions I suppose, but I’ve honestly no idea what I’m doing here; Small-town, financially-illiterate (but frugal) boy with more responsibility of managing this cash appropriately than I know how to deal with. I want to do my family right. Should I be honoured with a response, I’m sure there’s at least a few readers of yours equally naive as myself that may find your answer helpful.

In reality, if you buy a detached in the GTA, $500,000 down will still leave you with a $1 million mortgage. Payments/property tax/insurance will be just under $7,000 a month. Add in the opportunity cost of the downpayment (at a modest 6%) and that jumps to almost $10,000. In other words, buying and carrying the house would be a burden equalling almost 100% of your income.

Why? How does that possibly make sense?

If you retain the half-million in cash in a non-reg account, supplemented by some income generated by TFSAs, then at least $3,000 a month will be available to finance a rental. Add in a grand and that’s enough to rent a nice 3-bedroom townhome in the burbs. Advantages: you live for far, far, far less overhead. You retain all of your liquid wealth for your family and your future. And you don’t take on $1,000,000 in debt.

As for a non-registered account, stick with a balanced and diversified ETF portfolio. Make it joint – to reduce tax and protect your spouse if something happens. Returns will be taxable, but if taken as dividends or capital gains the hit is small. If you do lose your mind (or face a divorce) and must buy a home, there are no costs involved in liquidating this kind of account. But don’t. If you waver, Chris, have her call me.  Life will never be the same after that.

About the picture: “This is a picture of our friend Jackson,” writes Brent. “Much appreciated if he could find his way to your blog. You were kind enough to reply to an email five years ago when my wife and I lost our dog. We had 14+ wonderful years with her. You suggested that we “remember the good, and all the days together. Nothing gold can stay”. They were kind and comforting words. Thank you. Jackson lost his family, and we lost friends, last week in a horrid act of violence in St Catharines, Ontario. Jackson’s family loved him very much, as do we. A sad reminder that time is the most valuable thing we have.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.