There's another relevant guarantee, as well, that they never mention - in the ordinary course, apart from the rent on the money, they won't give you one dollar more, either. In recent years they've intoduced some inflation resistant features - but usually the potential cost to the consumer is substantial.

Suppose you'd given your bank $10,000. on a 5-year certificate, 15 years ago, and renewed the contract twice since.

They'd paid you the interest as agreed throughout those years.

If you choose to withdraw the money now, how much would you get?

Right - $10,000.

Remember how that $10,000. would have bought a decent car, 15 years ago? Not today.

The value of every one of those dollars shrank, in terms of what it would purchase, every one of those years.

Let's say that I was one of the eight or so borrowers to whom the bank would have lent that $10,000. 15 years ago, using it to buy an asset that continues to have value over a substantial term, such as a car (short term, and rapidly loses value) a table (retains anything like original value only if antique, usually), or a home (that has developed a good record of value increase), or a good quality stock, that have good records of increase in value.

Many people use borrowed money to buy a car, but buy stocks with cash. In Canada, unless you're in business for yourself, the interest on the auto loan isn't deductible, but if you borrow money to buy an asset that will likely produce income, the interest cost is deductible. Unless you borrow to invest in a currently tax-deductible Registered Retirement Savings Plan: such interest is not deductible.

So - borrow to buy your (non-RRSP) stock, but buy your vehicle for cash.

So - I pay a little higher interest rate than the bank pays you for the money that they borrowed from you (but they're still laughing, because they lent that money to about 7 other borrowers, as well).

Suppose I let that loan run, paying only the interest, for 15 years. How much do I have to pay back to the bank?

The same $10,000. that they use to pay you the money that they borrowed from you.

That'll buy a lot less now than when I borrowed it.

When you invest in dollar-denominated assets - you lose to inflation.

When I borrow a dollar-denominated asset - I gain, so long as the asset gains in value faster than the interest cost that I paid. But we're not talking about what the asset must gain in order to cover my interest, we're only talking about the effect of inflation on the asset itself.

I repay each dollar of the amount originally borrowed - with dollars each of which has shrunk in value every year that I was using it.

If anyone disagrees with my logic - speak up. I'll listen.

ole joyful

The premise is correct. They paid mortgage with ever-depreciating dollars and sold an appreciated asset after a few years, which they rolled over to the next heavily mortgaged house. Works fine unless there is a crash (real estate or stock market).

That can sometimes be called one of them, " ... crashing in flames ... " deals, can't it.

If you get laid off, can't make payments on the $250,000. mortgage of the house that you bought for $300,000. ...

... and after the mortgage company forecloses, the house is sold for $250,000., but there were foreclosure, sale, and a raft of other costs that ate up $35,000. ...

... guess who still owes the mortgage company $35,000.???

Don't forget to keep your powder dry.

ole joyful

And carry a large mortgage.

With both of them working and saving mightily in order to meet the mortgage payments.

Sometimes having very little furniture in the home.

If there's a recession, including downsizing, and one gets laid off and can't find work ...

... what do they do?

Lose it, almost certainly.

If they have building skills, wouldn't it be wiser to buy a modest home that needed repairs, with a much lower mortgage, use the savings on the mortgage cost they'd have been paying on the other house to buy building materials to fix the , then sell it for a higher price?

That would give them a much larger down payment on a larger home - so they'd be less at risk in case of loss of employment which persisted for a time.

Have a great week, everyone.

ole joyful

And I'm embarrassed that I wasn't more careful in making a link to where I thought it to be, when it was buried fairly deep in this forum, all along.

Sorry to have led you on something of a wild goose chase, folks.

I'd appreciate your comments on the various ideas presented.

ole joyful

When you take it to the large house, small house part, while the financial concept still works, so many other choices get involved. Many people simply refuse to compromise on school districts for their children and will stretch their financial picture enormously to get there. I.e. bigger house in the "right" neighborhood. You can't blame them really. Not sure where the idea went to downsize to one income and actually do some of the things that people rely on schools to do now went but times change.

Around here, when employees buy a car, interest on the loan is not deductible ... if they operate a business, in most cases it is.

If they borrow to invest in a tax-deferred retirement account, the interest is not deductible, either.

However, if they borrow to invest in an asset that is expected to produce taxable income, the interest is deductible.

A while ago some people, mainly seniors, rather chortled over their apparent good fortune as they told me how they earned 19% on their Canada Savings Bonds about 1981.

I suggested that if they were in 20% income tax bracket, that would reduce the pre-tax 19% to after-tax income of about 15%.

And did they know what the rate of inflation was that year? About 12%.

As the number of dollars of their underlying asset can't shrink, it can't grow, either ... and the value of each dollar was eroded by more or less the value of inflation (or more) each year, going back to about 1935 during that Great Depression.

So the investor in guaranteed-number-of-dollars must put a good portion of the annual after-tax earnings with the principal in order to maintain purchasing power, since the value of each of those dollars of asset shrank every year of the last 70.

Ordinary folks put their money into the bank.

Rich folks buy the bank.

Because they know that, in most cases, owning is better than loaning (your money to the bank).

Good wishes for increasing knowledge of how money - and taxes - work.

ole joyful

As its usage isn't deductible, for most people, so interest on the loan to buy it isn't, either.

And buy stocks or other investments after saving for a while, for cash.

However, for many of us, when we borrow to invest, the interest is deductible (though, for Canadians, not if they do so to invest in a tax-deferred retirement system, i.e. RRSP).

Since interest on my loan to buy a car isn't deductible, and interest on a loan to buy non-retirement fund investments is deductible, I prefer to pay cash for the car, as much as I can, and borrow to invest.

Also, if I have some of the certificates issued for mutual funds that I own (usually at no fee) or individual stocks (usually at a fee of $35. - 50. per transaction), if I take them to the lender to use as collateral, I'll achieve a reduced interest rate on my loan.

Especially if the loan is to buy a car, for it's much easier t sell the stocks/mutual funds, than to repossess and sell the car ... therefore, cheaper.

Good wishes for increasingly skillful managment of both income and assets.

ole joyful

ole joyful