Using LOC to max out TFSA

[sportyrichmd]

So I know a lot of people say not to invest with money that you don't have, but hear me out. I am a 21 year old incoming medical student with an LOC of $350k at prime-0.25%. I anticipate, conservatively, going into $125k debt over the next four years (mainly cost of tuition, as I am living at home and therefore don't have to pay for rent, food, phone bill, etc.). Should I spend $23k from my LOC to max out my TFSA now, and continue to max out my TFSA every year? I was planning on investing using Wealthsimple, with 90% equity and 10% bonds. I imagine this would decrease the amount of OSAP I get as TFSA is an asset, which is a consideration. Thanks!

[BalkanRelations]

I'd also be interested in hearing everyone's opinion on this. I started considering the same thing, as a second year med student, now that the prime rate has dropped by over 2%. 

[DrOtter]

I mean it could be slightly profitable if the net rate of returns on the TFSA is > interest rate, but this is not guaranteed in 4 years and the interest rate can change depending on prime. e.g. 3% for TSFA and 2.2% for the LOC -> you'll potentially (and ideally) be earning net 0.8% interest. Bear in mind, though, that the interest rate on the LOC is guaranteed (and is calculated and compounded every month), whereas the return on the TFSA is not (you can lose money in market fluctuations one month to the next, so there will be months where you'll either lose money at more than the 2.2% interest rate, or where the return is not high enough to cover the 2.2% LOC interest). Longer terms than 4 years might be a little bit safer since the risk is averaged out, but again the LOC calculates and compounds interest consistent vs. the monthly unpredictability of TFSA (or any investments really).

So personally, I would be too risk averse to take out loans to play with. 

[VivaColombia]

Play around with the numbers on OSAP if you get funding from there too. The balance of 23,000 on your TFSA may wipe out your grants portion of OSAP so input the info and see where you stand. If you believe you can make more than the grants portion per year by keeping a TFSA, you should invest in the market (and vice versa). Markets are unstable and your investments could go up or down but the grants of OSAP are guaranteed for the amount quoted by them. 

[sportyrichmd]

I was looking at prime rates in the past 10 years and they've ranged from 3-4% (they were higher before the 2008 recession). Usually average rate from investments is 7% over long term.

I looked at my OSAP and I'm already not getting any grants because I'm living at home.

I don't think I'd be using this money from my TFSA for a long time (eg. retirement).

My reasoning is that if I was living away from home I'd be using this money for rent/living expenses anyway so I might as well do this.

[VivaColombia]

1 minute ago, sportyrichmeia said:

I was looking at prime rates in the past 10 years and they've ranged from 3-4% (they were higher before the 2008 recession). Usually average rate from investments is 7% over long term.

I looked at my OSAP and I'm already not getting any grants because I'm living at home.

I don't think I'd be using this money from my TFSA for a long time (eg. retirement).

My reasoning is that if I was living away from home I'd be using this money for rent/living expenses anyway so I might as well do this.

Makes sense then to invest in a TFSA! 

[sportyrichmd]

1 minute ago, VivaColombia said:

Makes sense then to invest in a TFSA! 

I just played around with the aid estimator and the amount of OSAP I get didn't go down even when I put $23k in assets!

[Bambi]

The real issue is what investment(s) to make with this cash in your TFSA. We are living in very uncertain times when considering the stock market. If you are able to pick up BCE @ 53, with a dividend of over 5%, you are relatively safe with a decent return. I wouldn’t, however,  it at its last close of $56.62 for fear it will go lower. Covid-19 has tanked many economies and whereas before Covid, the market was volatile, we are in even more un chartered eaters with the potential for many unhappy surprises. You want to gamble or speculate with borrowed money!  

[sportyrichmd]

10 minutes ago, Bambi said:

The real issue is what investment(s) to make with this cash in your TFSA. We are living in very uncertain times when considering the stock market. If you are able to pick up BCE @ 53, with a dividend of over 5%, you are relatively safe with a decent return. I wouldn’t, however,  it at its last close of $56.62 for fear it will go lower. Covid-19 has tanked many economies and whereas before Covid, the market was volatile, we are in even more un chartered eaters with the potential for many unhappy surprises. You want to gamble or speculate with borrowed money!  

I would be investing in index fund ETFs, having a diverse and balanced portfolio using Wealthsimple. I'm definitely not investing in individual stocks haha

[Lavarball]

Why don't you choose something like questrade and investing in XEQT in 100% equity instead of wealthsimple. It'll be almost as simple and plus it'll save you quite a bit of fees.

[JTFW]

There is no right or wrong answer. It is all about how much risk you want to take. If you don't invest, you will not gain anything (nor will you lose anything). If you do, depending on your risk profile, you can lose a lot or a little. You can speak to your financial advisor about it. Personally, I think the LOC interest is as low as it will get. As long as you diversify your portfolio and aim for long term investment, I think it's a good opportunity. 

[sportyrichmd]

2 hours ago, Lavarball said:

Why don't you choose something like questrade and investing in XEQT in 100% equity instead of wealthsimple. It'll be almost as simple and plus it'll save you quite a bit of fees.

I don't know how I feel about investing by myself yet. I'm nervous about staying disciplined and choosing the right one.

2 hours ago, JTFW said:

There is no right or wrong answer. It is all about how much risk you want to take. If you don't invest, you will not gain anything (nor will you lose anything). If you do, depending on your risk profile, you can lose a lot or a little. You can speak to your financial advisor about it. Personally, I think the LOC interest is as low as it will get. As long as you diversify your portfolio and aim for long term investment, I think it's a good opportunity. 

Thanks for your opinion and advice!

[Bambi]

5 hours ago, sportyrichmeia said:

I would be investing in index fund ETFs, having a diverse and balanced portfolio using Wealthsimple. I'm definitely not investing in individual stocks haha

With Covid and the economy uncertainty, I would stay out of the market entirely.

[MDinCanada]

I would stay out of the market unless you're close to graduation/have a source of income.

 

[Lavarball]

8 hours ago, sportyrichmeia said:

I don't know how I feel about investing by myself yet. I'm nervous about staying disciplined and choosing the right one.

Thanks for your opinion and advice!

Imma be honest. If you don't feel comfortable even using questrade to do a simple etf trade then I think you're not ready to use leverage to invest. The behavioral risk with staying disciplined would still exist with wealthsimple if you decide to withdraw during a market downturn. 

It does seem like a great time to borrow to invest however with the real cost of interest nearing zero so if you have a long time horizon of 10+ yrs then just leave your tfsa in an index fund and never touch it again.

[sportyrichmd]

5 hours ago, Lavarball said:

Imma be honest. If you don't feel comfortable even using questrade to do a simple etf trade then I think you're not ready to use leverage to invest. The behavioral risk with staying disciplined would still exist with wealthsimple if you decide to withdraw during a market downturn. 

It does seem like a great time to borrow to invest however with the real cost of interest nearing zero so if you have a long time horizon of 10+ yrs then just leave your tfsa in an index fund and never touch it again.

My hesitation comes from wanting to just put my money into Wealthsimple and then forget about it, whereas if I use questrade my understanding is that I would have to look at it and rebalance my portfolio myself. I don't think I'm comfortable investing in only one ETF; I want an even more diversified portfolio.

After doing more research into this, though, I do think I'm leaning towards not doing it anymore. If interest rate is about 3% and inflation is an additional 3%, then my best scenario return would be about 1%... I'm not sure if that would be worth the risk.

[Bambi]

It isn’t!

[BigM]

2 hours ago, sportyrichmeia said:

My hesitation comes from wanting to just put my money into Wealthsimple and then forget about it, whereas if I use questrade my understanding is that I would have to look at it and rebalance my portfolio myself. I don't think I'm comfortable investing in only one ETF; I want an even more diversified portfolio.

After doing more research into this, though, I do think I'm leaning towards not doing it anymore. If interest rate is about 3% and inflation is an additional 3%, then my best scenario return would be about 1%... I'm not sure if that would be worth the risk.

The idea of using an all-in-one ETC such as XEQT is that you wouldn't need to do any rebalancing.  The only thing you would occasionally need to do is log on to re-invest your dividends quarterly.  I am in independent practice now, but if I were to go back to my time at the beginning of residency I would have maxed out my TFSA (there would likely have been financial implications as a medical student on grants, etc that I wouldn't have wanted to effect).  I did actually invest $30,000 in my 4th year of residency and made $3,000 interest over a year, but I later needed the money to finance a mini-van for the family so had to pull it out.

As someone mentioned above, if you are going to run the risks of leverage investing, then you want to get everything on your side.  The expenses you pay for owning an all-in-one ETF on Questrade are lower than the expenses you will incur with Wealthsimple, this lowers your overall risk as the stocks don't need to perform as well to exceed the interest cost of the LOC.

[sportyrichmd]

1 hour ago, BigM said:

The idea of using an all-in-one ETC such as XEQT is that you wouldn't need to do any rebalancing.  The only thing you would occasionally need to do is log on to re-invest your dividends quarterly.  I am in independent practice now, but if I were to go back to my time at the beginning of residency I would have maxed out my TFSA (there would likely have been financial implications as a medical student on grants, etc that I wouldn't have wanted to effect).  I did actually invest $30,000 in my 4th year of residency and made $3,000 interest over a year, but I later needed the money to finance a mini-van for the family so had to pull it out.

As someone mentioned above, if you are going to run the risks of leverage investing, then you want to get everything on your side.  The expenses you pay for owning an all-in-one ETF on Questrade are lower than the expenses you will incur with Wealthsimple, this lowers your overall risk as the stocks don't need to perform as well to exceed the interest cost of the LOC.

Can I PM you?

[BigM]

17 minutes ago, sportyrichmeia said:

Can I PM you?

Sure

[rmorelan]

On 7/1/2020 at 11:32 AM, sportyrichmeia said:

So I know a lot of people say not to invest with money that you don't have, but hear me out. I am a 21 year old incoming medical student with an LOC of $350k at prime-0.25%. I anticipate, conservatively, going into $125k debt over the next four years (mainly cost of tuition, as I am living at home and therefore don't have to pay for rent, food, phone bill, etc.). Should I spend $23k from my LOC to max out my TFSA now, and continue to max out my TFSA every year? I was planning on investing using Wealthsimple, with 90% equity and 10% bonds. I imagine this would decrease the amount of OSAP I get as TFSA is an asset, which is a consideration. Thanks!

I think the primary drawback you maybe the loss of OSAP funding so I would do that math there - in my case the free money (in my case grant plus no interest payment was higher than the expected return on any investment. However again at the time RRSPs were not considered assets so could have filled that etc). 

Objective smallish amounts won't make or break anyone - I can see the temptation with the low rate, and tax free status. We have to be careful not to be blinded by how low the rates are (usually any of this would be relatively silly as the interest rates are still way below historical norms). TFSA's as tax free investments also wipes out some things. 

I always remind people that they are investing quite heavily right now anyway - in themselves basically. Whatever you do don't have that threatened. 

Also ha on a pure investment approach point - what is the point of having bonds at all right now? At what point would you do anything with the money you are investing? 

At your stage, and with a mix like you are proposing, I would probably just do a simply all in one rather than wealthsimple (which will hit you with a 0.5% fee for really in your case no reason). Just like BigM is suggesting. 

Also if you are going down this route - take the time now to read some basically financial planning books if you haven't already That sort of them pays off hugely in the end. 

 

[sportyrichmd]

21 minutes ago, rmorelan said:

I think the primary drawback you maybe the loss of OSAP funding so I would do that math there - in my case the free money (in my case grant plus no interest payment was higher than the expected return on any investment. However again at the time RRSPs were not considered assets so could have filled that etc). 

Objective smallish amounts won't make or break anyone - I can see the temptation with the low rate, and tax free status. We have to be careful not to be blinded by how low the rates are (usually any of this would be relatively silly as the interest rates are still way below historical norms). TFSA's as tax free investments also wipes out some things. 

I always remind people that they are investing quite heavily right now anyway - in themselves basically. Whatever you do don't have that threatened. 

Also ha on a pure investment approach point - what is the point of having bonds at all right now? At what point would you do anything with the money you are investing? 

At your stage, and with a mix like you are proposing, I would probably just do a simply all in one rather than wealthsimple (which will hit you with a 0.5% fee for really in your case no reason). Just like BigM is suggesting. 

Also if you are going down this route - take the time now to read some basically financial planning books if you haven't already That sort of them pays off hugely in the end. 

 

Can I PM you?

[rmorelan]

32 minutes ago, sportyrichmeia said:

Can I PM you?

oh of course 

[Lavarball]

.

 

 

[ZBL]

I’ll suggest a bit of a different idea. Instead of maxing out the TFSA, why not put in an amount you would be comfortable losing. If your education and living aspect is all taken care of, and it won’t affect any student loans or anything, then put a small amount in the TFSA, 5K, 10K, 20K etc - whatever you would be comfortable with should it go POOF, gone. Here’s why I say that:

Investing is hard. It’s not as easy as read a book then put money in this stable ETF or mutual fund and sit back and relax for most people. You can read all the books in the world on investing, assessing company value, how to balance a portfolio etc but no resource in the world will teach you how to control yourself and your discipline if something suddenly tanks, or if it suddenly rockets, or if the entire market falls, or if that YOLO out of the money call just looks too good to pass up.
 

Like medicine, investing is more about experience than simply reading how to do it. Also like medicine, you need to have a bit of a game plan going in and a bit of an algorithmic approach should things get crazy. In a market as volatile as ours is now, you can gain A LOT of experience in a short amount of time compared to say 2010-2019 where the only market direction was up. Therefore, I think using a small portion of the TFSA to practice investing is wise - better to do that now and make your mistakes with money you won’t miss compared to down the road when you are playing with staff-size dollars. Of course, the likelihood of your investment going to zero is probably near zero as long as you aren’t just straight up gambling on ridiculous calls or penny stocks.