The ugly true about the hidden cost of my margin account debt

We had a strong start to the morning for the TSX. I thought we were going to exceed 20,300 points, but we closed the day at 20,260.13. It wasn't a bad day, and as long as we remain above 20,000 points, I will be happy. My non-registered portfolio closed the day at $145,789.22, my US portfolio at $5,206.19, my RRSP stocks-only portfolio at $65,387.33, and my TFSA portfolio at $127,540.48. The debt on my margin account still remains the same at $44,066.21. I have $61,290.24 available to invest on margin, but of course, I won't be investing that money anytime soon, especially at an interest rate of 8%.

In 2022, I was charged around $2,500 in interest for my margin account. It wasn't an excessive amount, but if I had kept my margin debt at $46,787.51 in 2023, the interest charged would have been $3,743. While I've never had an issue with managing a margin account, the current interest rate of 8% is becoming a concern for me.

I just filed my 2022 tax return and I'm expecting a $1,000 cash refund. This refund is due to my contributions to my RRSP, expenses for dental and eye care, and the interest earned on my margin account, which I declare as a financial fee every year. Despite my job and dividend income, and some capital gains, my income still exceeded $70,000. It's difficult to pay less tax without contributing more to my RRSP, but I'm not keen on doing that at the moment.

Since I'm expecting a tax return of $1,000, I can see that my margin cost me $1,500 directly out of my pockets for the year 2022. It's not an excessive amount for a bit of fun on margin. However, in 2023, with my margin debt at its current level of $44,000, it will cost me a whopping $3,520. If I expect to receive the same $1,000 tax refund as in 2022, my margin account will cost me $2,520, which is equivalent to $210 per month. It's beginning to add up. Additionally, there may be tax increases to consider, so I may not receive a $1,000 refund for my 2023 tax income.

At a certain point, it's not worth keeping my margin debt that high, which is why I began to pay it down. I am thinking of adding an extra $2,000 to it.

While the TSX had a decent day and all of my portfolios are performing well, I am becoming increasingly concerned about the high-interest rate on my margin account debt. I believe that my decision to pay down my margin debt is a wise one. The cost of maintaining such a debt could eventually outweigh the benefits of the investments held on margin. With the potential for tax increases in the future, I am considering all aspects to ensure long-term financial stability.

Reflecting on my Investment Journey: A Detailed Review of My Debt and Portfolio Development from 2007 to Present

A few days ago, I received a special request on Twitter from @jdilillo suggesting an idea for my next blog post: a comprehensive review of my debt situation.

I accept the challenge, my friend! For the past 14 years, my personal finance has provided me with various subjects to write about and I've never grown tired of it. One subject I frequently address on my blog is my debt. However, I've never written a comprehensive review of my debt over the years, so let's get started!

I do discuss my debt regularly. Whenever I publish an update on my investment portfolio, I also update my debt situation at the same time. These posts are labeled "debt situation" and can be easily found on the right-hand side of my blog under the "LABELS" column. This makes it simple to review my debt situation over time.

The Early Days: 2007

So, let's take a trip back in time to August 13, 2007. I was 26 when I published my first blog post. At the start of my financial journey, I had a mix of credit card and student loan debt. Here's a snapshot of my financial situation at that time:

Total credit card debt: $2,815.85

Student loans: $12,369.03 at 8.75%

Total debt: $15,184.88

I never felt uncomfortable with debt, but I always knew that I needed to avoid or quickly pay off credit card debt. I started my financial journey with a student loan of less than $15,000, which is a manageable amount. Fortunately, I was able to progress in my education without taking on too much debt. I have always been good at managing my money, even as a teenager. I was born in 1980 and the Internet became available when I was around 15-16 or 17 years old. I remember going to the high school library to access the Internet. At the time, we didn't fully understand what we were looking at, and we would browse slowly on big, heavy computer screens. Social media didn't exist then, and we weren't exposed to as much advertising and social trends as today's teenagers are.

In my opinion, today's world is not conducive to saving money for young people. There are too many temptations, and social media is not helping the situation. In my day, we read books, played outside, and spent less time online. My fondest childhood memories are from playing in that sand pit that my father made for us behind the house. I loved playing with bricks, and we had plenty of them. Social media, YouTube, etc. have both good and bad aspects. On the positive side, for those who want to learn about saving money and investing, information is now more readily available than ever before. 

And that's because of the Internet. The abundance of information available online can be both good and bad. Ultimately, it is the responsibility of parents to educate their children about money matters. I was taught the importance of saving money, to avoid credit card debt, and to be mindful with my finances. Money was important, but not a source of stress or obsession. I believe that growing up in New Brunswick, as I did, helped shape my relationship with money in a positive way. Being raised in the 80s in a smaller town probably made life less stressful and more manageable than living in a big city, where life can be more complicated and expensive.

I remember that before starting my blog in 2007, I made payments of $1,000 per month for about 6 months straight on my student loan, and after that, I only made the minimum required payment. So my student loan debt was probably slightly over $12,000 when I completed my studies, but it never reached 40k or 50k. Today, everything is more expensive, including tuition fees. Many young people are starting their adult lives with a significant amount of student debt, which can be a difficult burden to bear.

I am aware that many millennials are facing complex financial situations due to high levels of student loan debt. Making minimum payments on these loans every month can make it challenging to save money. I have never had to deal with severe limitations, and I have always had a fair degree of freedom in my choices. Personally, I never experienced much stress in regards to paying off my student loan debt as it was small, and I could claim the interest on it as a deduction on my income tax. I view debt as a normal aspect of life, up to a certain degree.

In September 2007, I managed to pay down my credit card debt to $3,800.

Back in February 2008, it appears that I was still grappling with credit card debt.

In April 2009, this was my debt situation:

Student loan debt: $10,627.99

Credit card debt: $3,000 at 4.99% interest for 6 months

Credit line debt: $2,992.74

Total debt: $16,620.73

I recall receiving credit card balance transfer offers with low-interest rates, and I took full advantage of those opportunities at that time. Back then, there was no need to pay a current 1% balance, those were the good old days. I used the money to invest, of course.

In August 2009, I was still enjoying the benefits of credit card balance transfers, and I had a credit line debt...

"I have $4,813.02 on my TD credit line, and $2,675.53 on my TD Visa at a 3.99% interest rate. In about two weeks, I plan to transfer my debt from my TD Visa to an RBC Visa so I can take advantage of the 2.99% interest rate for a while, until I can get a third job or something."

I was ambitious, but I only dealt with small amounts.

2010: The Year I Opened My Margin Account

In February 2010, I took out a $10,000 RRSP loan.

Here's what my debt situation looked like in February 2010:

$8,517.94 at 4.75% = $404.60 in annual interest 

$4,817.03 at 3.5% = $168.60 in annual interest 

$4,436.21 at 3.9% = $173.01 in annual interest

$3,587.13 at 8% = $286.97 in annual interest

$10,000 at 4.75% = $475 in annual interest

Total debt: $31,358.31

Total annual interest: $1,508.18

Back in May 2010, I became interested in opening a margin account for my non-registered Canadian investment portfolio. In September 2010, I had a mix of student loan debt, RRSP credit line, and credit line debt, but no more credit card debt. In December 2010, I opened my margin account at TD Waterhouse. At the time, TD Waterhouse had an office located at the Eaton Center in downtown Montreal. I signed the papers for my margin account at that location. I still remember the day I opened my margin account because it was an exciting day for me. When I went back home, it was dark outside and there was a lot of snow.

When I opened my margin account on December 11, 2010, my non-registered portfolio was already established to a certain extent. At that time, the value of my non-registered portfolio was $72,232.12, while the value of my margin was $43,653.66. I had three years of experience investing in stocks. Although not a lot, I started investing just before the 2008 stock market crash, which in my opinion gave me the equivalent of ten years of experience. I believe I made the right decisions. When I opened my margin account, I did so because I wanted to have a greater holding than what I had at the time. I don't recommend that anyone start investing immediately with a margin account. It's better to first establish and build up your investment portfolio, observe its performance, gain some experience, and then consider opening a margin account.

I went from having a $0 debt on my margin account in 2010 to a $100,141.73 margin debt at 5% in August 2018. However, I only remained in the $100,000 margin debt range for a few months. At one point, I wasn't feeling comfortable anymore with my $100,000 margin debt situation. One reason was the uncertainty caused by President Donald Trump, and another reason was that I knew that at some point, the interest rate would eventually increase, and I didn't want to be stuck with a large $100,000+ margin debt. By November 2018, my margin debt had decreased to a more manageable level of $66,373.29, with an interest rate of 5.50%.

I went from having a $0 margin debt in 2010 to a $100,141.73 margin debt at 5% in August 2018. However, I only remained in that debt range for a few months. I started feeling uncomfortable with my debt situation due to uncertainty caused by President Donald Trump and the potential for an increase in interest rates. By November 2018, I reduced my margin debt to a more manageable level of $66,373.29, with an interest rate of 5.50%.

I feel comfortable when my margin debt is under $50,000. Currently, that debt is at $46,787.51 with an interest rate of 7.75%. I have been building up some savings and I am considering using it to partly pay down my margin debt. If I need money for any reason, I could withdraw it from my margin account. At 42 years old, I think it is the right decision.

You can follow me on Twitter, @SunnyJNB