If you use credit cards...you are using leverage to invest.

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techcrium
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If you use credit cards...you are using leverage to invest.

Post by techcrium » Tue Jan 21, 2014 3:53 pm

Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.


That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.

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TheTimeLord
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Re: If you use credit cards...you are using leverage to inve

Post by TheTimeLord » Tue Jan 21, 2014 3:55 pm

techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.


That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
If he pays his bill off at the end of the month then the investor obviously didn't use the money to invest. I think by that logic when you buy mutual funds from Vanguard and they reflect the purchase immediately but the money remains in your bank account for a couple days you also took a loan. Maybe technically you are correct on some level but hard to see it practically.

BTW, my Fidelity AmEx pays 2% cash back.
Last edited by TheTimeLord on Tue Jan 21, 2014 4:00 pm, edited 2 times in total.
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Re: If you use credit cards...you are using leverage to inve

Post by RyeWhiskey » Tue Jan 21, 2014 3:58 pm

techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.


That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
I don't think that's what most people mean when they say they "use credit cards." I use credit cards to buy stuff I need: gas, groceries, etc... This money would have come out of my checking account but instead I charged it to save 1.5%. I pay it off out of my checking account each month. There's no investments involved what-so-ever.

In my opinion, investments are separate from personal finances (i.e. credit cards). Investments are passive and long term. Personal finances are active and short term. Just my two cents.
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Re: If you use credit cards...you are using leverage to inve

Post by surfstar » Tue Jan 21, 2014 4:02 pm

High yield savings @ 0.9% / yr is how much on $1,000 over 21 days? Negligible. I'm purchasing on credit, not taking loans out monthly.

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Re: If you use credit cards...you are using leverage to inve

Post by techcrium » Tue Jan 21, 2014 4:02 pm

StarbuxInvestor wrote: If he pays his bill off at the end of the month then the investor obviously didn't use the money to invest. I think by that logic when you buy mutual funds from Vanguard and they reflect the purchase immediately but the money remains in your bank account for a couple days you also took a loan. Maybe technically you are correct on some level but hard to see it practically.
BTW, my Fidelity AmEx pays 2% cash back.
RyeWhiskey wrote: I don't think that's what most people mean when they say they "use credit cards." I use credit cards to buy stuff I need: gas, groceries, etc... This money would have come out of my checking account but instead I charged it to save 1.5%. I pay it off out of my checking account each month. There's no investments involved what-so-ever.

In my opinion, investments are separate from personal finances (i.e. credit cards). Investments are passive and long term. Personal finances are active and short term. Just my two cents.
Yes but theory, it is still leverage.

One is a 21 day leverage on a credit card carrying 0% interest

The other is a 365 day leverage on a loan carrying a low interest (such as 2%)

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Dutch
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Re: If you use credit cards...you are using leverage to inve

Post by Dutch » Tue Jan 21, 2014 4:03 pm

techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.

That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
Yes, but so what?

I've never heard of anyone investing 21 days out of every month, only to sell their investments at the end of each month to pay off their credit card. Have you?

I don't understand the point you're trying to make with this contrived example.

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Re: If you use credit cards...you are using leverage to inve

Post by stoptothink » Tue Jan 21, 2014 4:10 pm

Dutch wrote:
techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.

That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
Yes, but so what?

I've never heard of anyone investing 21 days out of every month, only to sell their investments at the end of each month to pay off their credit card. Have you?

I don't understand the point you're trying to make with this contrived example.
Check out the OP's other thread http://www.bogleheads.org/forum/viewtop ... st=1931902 . I think they may actually be doing exactly what you are saying. Some interesting ideas.

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Re: If you use credit cards...you are using leverage to inve

Post by Twins Fan » Tue Jan 21, 2014 4:16 pm

techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.


That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
Tell us what you mean by "invest" for 21 days.

I'm thinking most folks that use a credit card and pay it off each month leave the monthly money used for pay off sitting in a checking for savings account. I'd hardly call that "investing" or "leverage".

If someone takes out a $30k loan "invests" it in the market and pays back the loan a year later, sure I think we all see your point.

I'd say it's an apples and oranges comparison. Or, you're really reaching to try and knock those that use credit cards and pay them off monthly.

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Re: If you use credit cards...you are using leverage to inve

Post by TheTimeLord » Tue Jan 21, 2014 4:17 pm

techcrium wrote:
StarbuxInvestor wrote: If he pays his bill off at the end of the month then the investor obviously didn't use the money to invest. I think by that logic when you buy mutual funds from Vanguard and they reflect the purchase immediately but the money remains in your bank account for a couple days you also took a loan. Maybe technically you are correct on some level but hard to see it practically.
BTW, my Fidelity AmEx pays 2% cash back.
RyeWhiskey wrote: I don't think that's what most people mean when they say they "use credit cards." I use credit cards to buy stuff I need: gas, groceries, etc... This money would have come out of my checking account but instead I charged it to save 1.5%. I pay it off out of my checking account each month. There's no investments involved what-so-ever.

In my opinion, investments are separate from personal finances (i.e. credit cards). Investments are passive and long term. Personal finances are active and short term. Just my two cents.
Yes but theory, it is still leverage.

One is a 21 day leverage on a credit card carrying 0% interest

The other is a 365 day leverage on a loan carrying a low interest (such as 2%)
Seems to me the leverage buys gas, groceries, clothes and beer not stocks and bonds. I am sorry but not understanding the practical application. Personally I use credit cards for convenience, simplicity and rewards.
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Re: If you use credit cards...you are using leverage to inve

Post by Grt2bOutdoors » Tue Jan 21, 2014 4:20 pm

techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.


That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
Your reasoning is illogical. I spend $500 on credit and promptly pay on or before the due date. Leverage occurs when you incur a carry cost, I incur no such cost but from your last thread you clearly do. I also invest far more than my credit use and do so with unlevered cold hard cash with no encumberances. You on the other hand employ short to medium term debt and pay a carry cost of 1 to 3 percent to do so.
Last edited by Grt2bOutdoors on Tue Jan 21, 2014 6:55 pm, edited 2 times in total.
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techcrium
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Re: If you use credit cards...you are using leverage to inve

Post by techcrium » Tue Jan 21, 2014 4:34 pm

Grt2bOutdoors wrote:
techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.


That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
Your reasoning is illogical. I spend $500 on credit and promptly pay on or before the due date. Leverage occurs when you incur a carry cost, I incur no such cost but from your last thread you clearly do. I also invest far more than my credit use and do so with unleveed cold hard cash with no encumerances. You on the other hand employ short to medium term debt and pay a carry cost of 1 to 3 percent to do soi.
First, we agree that leverage is leverage. A $500 credit card spending and then paying it before the 21 day due date, despite how insignificant it is, it is still leverage.

Now, we can agree that there is an optimal leverage amount & time VS. factors like your networth and income.

For example,
If your income is $100 000 a year, you are saving $40 000 a year, and have $400 000 in assets, then clearly, a monthly $3000 cc leverage is considered by all means "safe".

If your income is $30 000 a year, you are borrowing $100 000 to leverage, then it would be deemed as "unsafe"

So to conclude, then we can agree that for each individual, there is an optimal amount of leverage that one can utilize. Now for my personal leverage may be deemed UNSAFE but, there is a margin of optimal leverage for each individual.

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Re: If you use credit cards...you are using leverage to inve

Post by afan » Tue Jan 21, 2014 4:41 pm

Yes, you are borrowing money at 0% interest for a few weeks at a time (unless you manage to do all your buying at the start of the month, your borrowing is distributed across the month, some right before they issue the bill, some right after the last bill was generated. As an alternative to paying cash, yes you are saving the opportunity cost by keeping your hands on that money.

However, if you are like most people, that borrowed money is sitting in your checking account waiting for you to pay the bill to the credit card company. At current interest rates the value of this float is pretty small. But you do manage to collect interest on those funds for a few weeks after you make the purchase but before you pay the credit card bill.

Unless you have a logical reason to buy massive amounts of stuff, or get much higher interest on the short term investments you hold to pay the bills, there is very little money to be made here. Now if real interest rates were much higher it might get interesting.

You are net borrowing, say, couple thousand dollars for a year at zero interest and collecting, say, 0.25-0.5% interest on it. If the principle averages $2,000, then you are making $5-$10 dollars. Nice, but not even the most important reason to use a credit card rather than paying cash.

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Re: If you use credit cards...you are using leverage to inve

Post by MnD » Tue Jan 21, 2014 4:42 pm

The revolving float is about 45 days of credit card spending as purchases are not paid for until 30 to 60 days from purchase date depending on where in the billing cycle purchases were made. Thus if you make an immediate switch from cash/check/debit to charge everything possible, it generates an amount of free cash equal to 45 days of your credit card spend.
It's been years since we made the switch but I think I had a big bill coming due and I realized this was a way to "generate" an additional $10K or so in free cash flow, collect a ton of sign-on bonuses and get 2% cash back on an ongoing basis. So I'm pretty sure I spent the cash-flow windfall as opposed to investing it.

If I opted to or were forced to unwind the position, it would require an additional $10k in cash from somewhere in order to do so, assuming a constant spending rate.
Not a problem for our household.
Last edited by MnD on Tue Jan 21, 2014 4:55 pm, edited 1 time in total.

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Re: If you use credit cards...you are using leverage to inve

Post by RyeWhiskey » Tue Jan 21, 2014 4:44 pm

techcrium wrote: First, we agree that leverage is leverage. A $500 credit card spending and then paying it before the 21 day due date, despite how insignificant it is, it is still leverage.
No, we don't agree. And we don't agree because I don't think that you understand what leverage is.
Wikipedia wrote:In finance, leverage (sometimes referred to as gearing in the United Kingdom and Australia) is a general term for any technique to multiply gains and losses. Most often this involves buying more of an asset by using borrowed funds. The belief is that the income from the asset will more than pay for the cost of borrowing. Almost always this involves the risk that borrowing costs will be larger than the income from the asset - causing a reduction in profits.
Leverage only applies to financial assets. Gas, groceries, dinner, these are not financial assets and hence you cannot leverage them. Not in the 'technical' sense that you are trying to use.
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Re: If you use credit cards...you are using leverage to inve

Post by techcrium » Tue Jan 21, 2014 4:47 pm

RyeWhiskey wrote:
techcrium wrote: First, we agree that leverage is leverage. A $500 credit card spending and then paying it before the 21 day due date, despite how insignificant it is, it is still leverage.
No, we don't agree. And we don't agree because I don't think that you understand what leverage is.
Wikipedia wrote:In finance, leverage (sometimes referred to as gearing in the United Kingdom and Australia) is a general term for any technique to multiply gains and losses. Most often this involves buying more of an asset by using borrowed funds. The belief is that the income from the asset will more than pay for the cost of borrowing. Almost always this involves the risk that borrowing costs will be larger than the income from the asset - causing a reduction in profits.
Leverage only applies to financial assets. Gas, groceries, dinner, these are not financial assets and hence you cannot leverage them. Not in the 'technical' sense that you are trying to use.
By leverage,

I actually meant the term "borrowing to invest". "invest" could be in the sense of a high interest checking account or stocks or etfs.

Using a credit card is "borrowing to invest". You are borrowing from the credit card at 0% for 21 days, and investing in a no fee savings account.

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Re: If you use credit cards...you are using leverage to inve

Post by Twins Fan » Tue Jan 21, 2014 4:50 pm

You are REALLY stretching here, tech.

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Re: If you use credit cards...you are using leverage to inve

Post by mhc » Tue Jan 21, 2014 4:51 pm

I agree with RyeWhiskey. Take a look at:

http://www.investopedia.com/terms/l/leverage.asp

When I go to a restaurant and eat my dinner before paying the bill with cash, I am not dining on leverage.

When the plumber comes to my house and repairs my hot water heater, and then I pay him when the job is done, I did hot get the job done on leverage.

Having a period of time between a purchase and paying the bill for the purchase is not leverage.

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Re: If you use credit cards...you are using leverage to inve

Post by techcrium » Tue Jan 21, 2014 4:54 pm

Twins Fan wrote:You are REALLY stretching here, tech.
Agreed but the logic still applies. Using a credit card is borrowing the money at 0% interest for 21 days to invest (in a checking account)

So once we agree upon that, then we can agree that everyone is borrowing money (or leveraging) to invest.

Then, we can agree that there is an optimal amount for each individual to borrow money (or leverage) to invest

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Re: If you use credit cards...you are using leverage to inve

Post by Mandrale » Tue Jan 21, 2014 4:58 pm

What's your point?

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Re: If you use credit cards...you are using leverage to inve

Post by techcrium » Tue Jan 21, 2014 5:00 pm

mhc wrote:I agree with RyeWhiskey. Take a look at:

http://www.investopedia.com/terms/l/leverage.asp

When I go to a restaurant and eat my dinner before paying the bill with cash, I am not dining on leverage.

When the plumber comes to my house and repairs my hot water heater, and then I pay him when the job is done, I did hot get the job done on leverage.

Having a period of time between a purchase and paying the bill for the purchase is not leverage.

But it is...during that 21 days, there could be the possibility that all your investments default, you lose your job, and won't be able to pay up the monthly credit card spendings. For example, the many Americans living paycheck to paycheck and using credit cards....that is using leverage.

But we agree that it is HIGHLY unlikely. Thus, this amount of leverage is considered safe

So we can conclude that there is an optimal amount of "leverage" or borrowing to invest, that is considered safe.

In your examples, when you dine at a restaurant, you are using "leverage". It sounds weird, I know. But essentially, the restaurant is hoping that you DON'T dine and dash and since most people don't commit such acts...this amount of leverage is safe

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Re: If you use credit cards...you are using leverage to inve

Post by techcrium » Tue Jan 21, 2014 5:02 pm

Mandrale wrote:What's your point?
My point is that everyone has an optimal amount of leverage that they should capitalize on that is considered safe.


Meaning, if you have $1million in assets, $100 000 a year income....you should have no problem buying another $100K on margin to invest. The chance of the stock market crashing 80% is high unlikely, just as unlikely as people dining and dashing when a restauranteur grants you leverage.

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Re: If you use credit cards...you are using leverage to inve

Post by Mandrale » Tue Jan 21, 2014 5:04 pm

techcrium wrote:
Mandrale wrote:What's your point?
My point is that everyone has an optimal amount of leverage that they should capitalize on that is considered safe.


Meaning, if you have $1million in assets, $100 000 a year income....you should have no problem buying another $100K on margin to invest. The chance of the stock market crashing 80% is high unlikely, just as unlikely as people dining and dashing when a restauranteur grants you leverage.
Again, what's your point of this thread? I don't think anyone would put balancing a credit card and balancing $100K investment on margin anywhere near the same bucket. Regardless of if they are of the same "theory".

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Re: If you use credit cards...you are using leverage to inve

Post by Epsilon Delta » Tue Jan 21, 2014 5:06 pm

techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.


That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
The credit card balance will vary from $2,000-$5,000. I would be interested in the logic of comparing this to a $30k loan. Even if they are both loans the details matter. First, 5k is much less than 30k. Second, it matters what is being done with the "borrowed" money, arbitrage a savings account is a lot different from investing in emerging markets.

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Re: If you use credit cards...you are using leverage to inve

Post by techcrium » Tue Jan 21, 2014 5:08 pm

Mandrale wrote:
techcrium wrote:
Mandrale wrote:What's your point?
My point is that everyone has an optimal amount of leverage that they should capitalize on that is considered safe.


Meaning, if you have $1million in assets, $100 000 a year income....you should have no problem buying another $100K on margin to invest. The chance of the stock market crashing 80% is high unlikely, just as unlikely as people dining and dashing when a restauranteur grants you leverage.
Again, what's your point of this thread? I don't think anyone would put balancing a credit card and balancing $100K investment on margin anywhere near the same bucket. Regardless of if they are of the same "theory".
My point is that they belong to the same theory. There is an optimal amount of leverage that everyone should utilize and that is depending on your income, your savings rate, your assets, and how well you can stomach magnified gains/losses.

IF you are responsible with credit cards...you should utilize credit card leverage. Right?

Well, if you are responsible with investing on margin...you should utilize margin leverage.

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Re: If you use credit cards...you are using leverage to inve

Post by Mandrale » Tue Jan 21, 2014 5:10 pm

techcrium wrote:
Mandrale wrote:
techcrium wrote:
Mandrale wrote:What's your point?
My point is that everyone has an optimal amount of leverage that they should capitalize on that is considered safe.


Meaning, if you have $1million in assets, $100 000 a year income....you should have no problem buying another $100K on margin to invest. The chance of the stock market crashing 80% is high unlikely, just as unlikely as people dining and dashing when a restauranteur grants you leverage.
Again, what's your point of this thread? I don't think anyone would put balancing a credit card and balancing $100K investment on margin anywhere near the same bucket. Regardless of if they are of the same "theory".
My point is that they belong to the same theory. There is an optimal amount of leverage that everyone should utilize and that is depending on your income, your savings rate, your assets, and how well you can stomach magnified gains/losses.

IF you are responsible with credit cards...you should utilize credit card leverage. Right?

Well, if you are responsible with investing on margin...you should utilize margin leverage.
Ok, then do it. It's your financial life, and your life in general. Do whatever you would like to do.

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Re: If you use credit cards...you are using leverage to inve

Post by TFinator » Tue Jan 21, 2014 5:13 pm

I think when you said leverage was based on how well people can stomach losses you summed this up. People don't use leverage because they are not comfortable with it. If you are, then use it.
Regardless, if the entire point of this is to say that some people are comfortable using leverage than others, well, then, I think my readership stops here.

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Re: If you use credit cards...you are using leverage to inve

Post by techcrium » Tue Jan 21, 2014 5:14 pm

Mandrale wrote:Ok, then do it. It's your financial life, and your life in general. Do whatever you would like to do.
Well now you are being condescending.

I am politely giving you the explanation for the reasoning on leverage and how everyone should do it (if that are responsible). It is one and the same with credit cards. Responsible credit card users will benefit greatly....irresponsible credit card users will go bankrupt

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Re: If you use credit cards...you are using leverage to inve

Post by lrak » Tue Jan 21, 2014 5:16 pm

I know a couple that was doing this back in the 1990s. Their Barnes and Noble credit card had no fee cash advance checks. The person would deposit a cash advance check for $20k into their MoneyMarket account. Get 5% APY for the month, then pay the bill off when it came due, and deposit another cash advance check a few days later. They were getting almost $1k/yr in interest.

The reason they started doing this was they were both avid readers. The cash advance checks counted as "spending" for 1% back. They were getting $200 B&N gift cards every month tax free.

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Re: If you use credit cards...you are using leverage to inve

Post by mhc » Tue Jan 21, 2014 5:20 pm

OP,

you are redefining terms, but who cares. They are only terms.

If you want to borrow money and invest it, go for it. If saying everyone (hyperbole) is already doing this because of the grace period on credit cards, go for it. I presume you are of the age of majority. If you are looking for people to agree with you, you may be disappointed.

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Re: If you use credit cards...you are using leverage to inve

Post by techcrium » Tue Jan 21, 2014 5:21 pm

mhc wrote:OP,

you are redefining terms, but who cares. They are only terms.

If you want to borrow money and invest it, go for it. If saying everyone (hyperbole) is already doing this because of the grace period on credit cards, go for it. I presume you are of the age of majority. If you are looking for people to agree with you, you may be disappointed.
Well, I am looking for a logical counter point that will make me question my actions. I know alot of people here are anti leverage so I don't expect anyone to agree with me.

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Re: If you use credit cards...you are using leverage to inve

Post by Twins Fan » Tue Jan 21, 2014 5:34 pm

techcrium wrote:
Twins Fan wrote:You are REALLY stretching here, tech.
Agreed but the logic still applies. Using a credit card is borrowing the money at 0% interest for 21 days to invest (in a checking account)

So once we agree upon that, then we can agree that everyone is borrowing money (or leveraging) to invest.

Then, we can agree that there is an optimal amount for each individual to borrow money (or leverage) to invest
Even in the days of 5 and 6% APY savings accounts, I don't think anyone considered the money the stashed in savings as "invested". That's where I thinkg you're really stretching.

If someone has $20k that they keep in savings almost all the time, but likes to charge $2k monthly expenses on a credit card and then pay the bill off is hardly "leveraging". They are simply doing it for convenience, points, rewards, etc. No one doing that is trying to beat any returns, or chase expected returns, or anything like that by "borrowing" that money.

Now, if someone didn't have $80k, borrowed $80k, and INVESTED all of it in the market/stocks/equities... That person has leveraged. Like you have, tech.

It seems tech's point in this thread is to make themself feel better about the way they have chosen to invest by borrowing lots of money. tech, you're young, you started investing at a pretty good time the past few years, and you have a great savings rate now at nearly 50% of your salary. I'd say you should have just plowed all your savings into investing and you'd be in fine shape. Good luck to you when the market is no "roaring" anymore.

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Re: If you use credit cards...you are using leverage to inve

Post by FNK » Tue Jan 21, 2014 5:45 pm

What a silly thread.

Yes, if you have debt going in one corner of your life and investments in another, you could connect them and call that leverage.

What you are missing is that real leverage multiplies risk. Credit card balance countered by emergency funds in an FDIC insured account hardly multiplies risk.

A mortgage countered by future earnings does not add risk compared to renting. Not making payments leads to homelessness in both cases.

The fact that there's a retirement portfolio does not really factor into these operations.

Now, if you have credit card debt that is not backed by cash in a bank, so that you can keep as many dollars as possible in the market, i.e., if you don't have an emergency fund, then yes, it is leverage, and it is outrageously stupid.

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Re: If you use credit cards...you are using leverage to inve

Post by mhc » Tue Jan 21, 2014 5:47 pm

techcrium wrote:
mhc wrote:OP,

you are redefining terms, but who cares. They are only terms.

If you want to borrow money and invest it, go for it. If saying everyone (hyperbole) is already doing this because of the grace period on credit cards, go for it. I presume you are of the age of majority. If you are looking for people to agree with you, you may be disappointed.
Well, I am looking for a logical counter point that will make me question my actions. I know alot of people here are anti leverage so I don't expect anyone to agree with me.
You should be more straight forward with what you are looking for. If you want the cons of using leverage, then ask for them. Otherwise, you are wasting people's time.

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Re: If you use credit cards...you are using leverage to inve

Post by Twins Fan » Tue Jan 21, 2014 5:56 pm

FNK wrote:What you are missing is that real leverage multiplies risk. Credit card balance countered by emergency funds in an FDIC insured account hardly multiplies risk.
There we go, that's what I've been trying to say. Thanks, FNK... you just summed up all my rambling in two sentences. :beer :D

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Re: If you use credit cards...you are using leverage to inve

Post by ajcp » Tue Jan 21, 2014 6:01 pm

mhc wrote:I agree with RyeWhiskey. Take a look at:

http://www.investopedia.com/terms/l/leverage.asp

When I go to a restaurant and eat my dinner before paying the bill with cash, I am not dining on leverage.

When the plumber comes to my house and repairs my hot water heater, and then I pay him when the job is done, I did hot get the job done on leverage.

Having a period of time between a purchase and paying the bill for the purchase is not leverage.
I'll bet you used electricity to type this post that you haven't paid for yet.

Everyone who isn't Amish uses leverage, QED.

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Re: If you use credit cards...you are using leverage to inve

Post by Dulocracy » Tue Jan 21, 2014 6:06 pm

My wife and I have enough money in checking to pay off our credit card. We do not use that money for investing at all. It is our living money. We pay off our credit cards at each pay period instead of each month. We pay in advance... before it is due, and we still have the money in the account to pay it off. In no way does that equate to investing on leverage.

If I had a car loan at 0% interest, but I invested instead of paying it off, you could argue that I am investing with leveraged money.

By simply using a credit card, I am not using leverage to invest unless I have NO money in the bank, NO emergency funds, and NO reserve of any sort, and I still put money into investments. Then I have a minuscule amount of leverage to my investing. Since I do not do those things, no, I am not using leveraged investing. I am, however, collecting cash back on purchases for which I have money but choose to use a method by which I can get financial gains.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: If you use credit cards...you are using leverage to inve

Post by Grt2bOutdoors » Tue Jan 21, 2014 7:02 pm

techcrium wrote:
Twins Fan wrote:You are REALLY stretching here, tech.
Agreed but the logic still applies. Using a credit card is borrowing the money at 0% interest for 21 days to invest (in a checking account)

So once we agree upon that, then we can agree that everyone is borrowing money (or leveraging) to invest.

Then, we can agree that there is an optimal amount for each individual to borrow money (or leverage) to invest
Using your logic - an investor has $100,000 mortgage - if you've read the forum, you'd agree that the borrower is "negative fixed income/bonds". Now, the same investor is long $100,000 in US Treasuries - the negative cancels out the positive, they are net zero in fixed income. There is no leverage.

Now, I have a $500 credit card bill - you in your logic believe I am levered to the tune of $500. However, I also at the time at purchase of that $500 basket of goods and services, was long $1,000 in my no-interest, no fee checking. My leverage is what? There is no leverage. However, I am long $500 in cash - my own cash, I did not borrow to attain it, I did not exchange my credit card in return for cash, I had it all along.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: If you use credit cards...you are using leverage to inve

Post by jimbojones » Tue Jan 21, 2014 7:21 pm

Grt2bOutdoors wrote:
techcrium wrote:
Twins Fan wrote:You are REALLY stretching here, tech.
Agreed but the logic still applies. Using a credit card is borrowing the money at 0% interest for 21 days to invest (in a checking account)

So once we agree upon that, then we can agree that everyone is borrowing money (or leveraging) to invest.

Then, we can agree that there is an optimal amount for each individual to borrow money (or leverage) to invest
Using your logic - an investor has $100,000 mortgage - if you've read the forum, you'd agree that the borrower is "negative fixed income/bonds". Now, the same investor is long $100,000 in US Treasuries - the negative cancels out the positive, they are net zero in fixed income. There is no leverage.
$100,000 mortgage is not a negative asset; it's a liability. Your example is a levered purchase of US treasuries. You levered by a factor of infinity.

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Re: If you use credit cards...you are using leverage to inve

Post by denovo » Tue Jan 21, 2014 7:35 pm

techcrium wrote:
Mandrale wrote:Ok, then do it. It's your financial life, and your life in general. Do whatever you would like to do.
Well now you are being condescending.

I am politely giving you the explanation for the reasoning on leverage and how everyone should do it (if that are responsible). It is one and the same with credit cards. Responsible credit card users will benefit greatly....irresponsible credit card users will go bankrupt
It's such a tiny example of leverage that it is useless to draw general applications for thousands of dollars off it.
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Re: If you use credit cards...you are using leverage to inve

Post by patrick » Tue Jan 21, 2014 7:46 pm

techcrium wrote:My point is that they belong to the same theory. There is an optimal amount of leverage that everyone should utilize and that is depending on your income, your savings rate, your assets, and how well you can stomach magnified gains/losses.

IF you are responsible with credit cards...you should utilize credit card leverage. Right?

Well, if you are responsible with investing on margin...you should utilize margin leverage.
There is at least one factor in determining the "optimal" amount that you did not list: the interest rate, which is 0% for credit cards that are paid in time, but higher than 0% for "normal" leverage. If it is indeed optimal to use some leverage when 0% interest is available, that does not necessarily mean that it is optimal to borrow anything at all at the higher rates available on margin brokerage accounts (or home mortgages, for that matter).

Also, note that for most of us the amount borrowed on credit cards is less than we have an ultra-safe assets. Consider a somewhat reasonable approximation of a credit card user. Say they have $300K in stocks, $100K in bonds, $20K in cash, and owe $2K on the credit card, then perhaps the overall portfolio should be seen as leveraged by 1.005 to 1 (which is negligible compared to the 2 to 1 leverage allowed on a margin brokerage account, much less the 5 to 1 leverage of a plain old 20% down home mortgage). But the overall portfolio is not much different from one with only $18K in cash and nothing on the credit card. The risk of the total net worth either way is that of a portfolio with about 72% in stocks, 24% in bonds, and 4% in cash. This is certainly not a risk that is "magnified" beyond the risk that can be readily obtained without using any leverage of any kind.

Finally, note that unlike the brokerage account (but like a normal home mortgage) you won't get a margin call during the grace period -- your credit limit can be cut but you'll still be able to pay off this month's balance regardless.

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Re: If you use credit cards...you are using leverage to inve

Post by MichaelM24 » Tue Jan 21, 2014 7:58 pm

Now, if you have credit card debt that is not backed by cash in a bank, so that you can keep as many dollars as possible in the market, i.e., if you don't have an emergency fund, then yes, it is leverage, and it is outrageously stupid.
+1

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Re: If you use credit cards...you are using leverage to inve

Post by jimbojones » Tue Jan 21, 2014 8:22 pm

patrick wrote:
techcrium wrote:My point is that they belong to the same theory. There is an optimal amount of leverage that everyone should utilize and that is depending on your income, your savings rate, your assets, and how well you can stomach magnified gains/losses.

IF you are responsible with credit cards...you should utilize credit card leverage. Right?

Well, if you are responsible with investing on margin...you should utilize margin leverage.
There is at least one factor in determining the "optimal" amount that you did not list: the interest rate, which is 0% for credit cards that are paid in time, but higher than 0% for "normal" leverage. If it is indeed optimal to use some leverage when 0% interest is available, that does not necessarily mean that it is optimal to borrow anything at all at the higher rates available on margin brokerage accounts (or home mortgages, for that matter).

Also, note that for most of us the amount borrowed on credit cards is less than we have an ultra-safe assets. Consider a somewhat reasonable approximation of a credit card user. Say they have $300K in stocks, $100K in bonds, $20K in cash, and owe $2K on the credit card, then perhaps the overall portfolio should be seen as leveraged by 1.005 to 1 (which is negligible compared to the 2 to 1 leverage allowed on a margin brokerage account, much less the 5 to 1 leverage of a plain old 20% down home mortgage). But the overall portfolio is not much different from one with only $18K in cash and nothing on the credit card. The risk of the total net worth either way is that of a portfolio with about 72% in stocks, 24% in bonds, and 4% in cash. This is certainly not a risk that is "magnified" beyond the risk that can be readily obtained without using any leverage of any kind.

Finally, note that unlike the brokerage account (but like a normal home mortgage) you won't get a margin call during the grace period -- your credit limit can be cut but you'll still be able to pay off this month's balance regardless.
Great post. I think this sums up the issue. Of the question becomes "if 1.005 to 1 is okay, at what point does it become a problem?"

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Re: If you use credit cards...you are using leverage to inve

Post by denovo » Tue Jan 21, 2014 11:17 pm

In other words, this would be like analogizing jaywalking or running a red light to robbing a bank.
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Re: If you use credit cards...you are using leverage to inve

Post by MnD » Tue Jan 21, 2014 11:57 pm

Back in the day (1980's) we used to put 50% down on a car, get a 30-month car loan and keep the car for 10-12 years.
Who knew we we were actually buying stocks on margin! :mrgreen:

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Re: If you use credit cards...you are using leverage to inve

Post by grog » Wed Jan 22, 2014 1:00 am

stoptothink wrote:
Dutch wrote:
techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.

That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
Yes, but so what?

I've never heard of anyone investing 21 days out of every month, only to sell their investments at the end of each month to pay off their credit card. Have you?

I don't understand the point you're trying to make with this contrived example.
Check out the OP's other thread http://www.bogleheads.org/forum/viewtop ... st=1931902 . I think they may actually be doing exactly what you are saying. Some interesting ideas.
Exactly. He posted his portfolio which made heavy use of borrowed money, everyone told him it was unwise, he belligerently resisted all the advice, and now he's got this thread to "prove" that leverage is fine, since, you know, most of us run incidental credit card balances for a couple of weeks at zero percent which is really just a hop, skip, and a jump away from borrowing tens of thousands of dollars and putting in the stock market. Riiiiiight.

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Re: If you use credit cards...you are using leverage to inve

Post by wander » Wed Jan 22, 2014 1:06 am

Good luck Op. For your information, the markets cannot go up forever.

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Re: If you use credit cards...you are using leverage to inve

Post by LH » Wed Jan 22, 2014 5:15 am

techcrium wrote:Let's assume you charge $3000 to your credit card each month...during that 21 day grace period, instead of paying directly to your credit card, you are using that extra money and time to invest and then pay it off.


That is no different than someone who is able to save 30K a year to invest....he obtains a low rate loan of 30K and then invests that immediately. A year later, he repays the loan with what he saved up. He then reapplies for a new loan for another 30K and so forth.
This is false, or not written well.

If I charge 3K to a credit card, I do not have 3K in cash.... I have bought items for 3K, say I charged 3K worth of snickers bars. I cannot invest that 3K. So right there, it does not work.

Now, if you are saying that:
1) a person has 3K
2)needs 3K of snickers bars
3) wants to invest the 3K in stock

then

1) buys 3K of snickers bar with a credit card with a 21 day float
2) buys 3K of stock with the cash sans commission
3) at end of 21 days, pays back 3K with...... what exactly???? do you sell the stock, again with a commission, and pay back the credit card???

well, guess what, you just bought 3K worth of snickers bars, except you paid commission for the stock purchase, and either lost or gained money depending on what happened with said stock......

This is not saving 30K......

Now, if you have DEBT, and are paying interest on it. and then buy stock, yes, you are using leverage to buy that stock. Its also true for buying a snickers bar, going to a movie etc. Because the opportunity cost of buying something, is not paying down the debt, and incurring the interest.

But its still not like saving 30K. You appear to be conflating a bunch of things?


Here is an example of mortgage debt = leverage.

Say I own 100K on my mortage at 4 percent.

I have 1K dollars. Barring stuffing it in a mattress:

1) I can pay down the mortgage and earn 4 percent (ignore taxes for simplicity). each year, I get 40 dollars.

OR

2) I can buy 1K of snickers bars, goto 1K worth of movies, or consume it in some way, by a car etc.

Or

3) buy 1K worth of stock.

So yes, anytime you have debt, you are leveraging everything you do going forward with said debt. leveraged snickers bar, leveraged stocks, etc.

But if I am paying off credit cards every 21 days, I get some sort of free loan, but I really cannot do anything with that money investing in stock, since I bought something with it..... And even if I used it to get a 21 day purchase of stock, nothing much has happened there, and people effectively do not do that. The 21 day float, does not amount to much.


Now if you want to say, you basically roll that 3K balance over continuosly, and that enables you over time to effectively have another 3K available, then sure, thats possible, and thats leverage, but thats NOT 30K. so maybe thats what you mean.

Say I make 3K each month.
Say I subsist on 3K of snickers bars each month.

at first pay period, I get 3K, I buy 3K of stock with it, use a credit card to buy 3K of snickers.

next pay period, I pay off the credit card debt with the new 3K, again buy 3K of snickers on credit.....

rinse repeat.

So yeah, there, you have 3K you can invest with (assuming the roll and your pay period coincide, and that you do not miss a payment, have fees etc.) that you would not have had otherwise, but again, that is not 30, just 3K.

Is that what you meant?

That is true, if you roll and pay off each month, you are having a free loan basically around the average amount you roll each month.

Now in reality, you would have to take total expenditure= stock buys + snickers buys + whatever else you buy and then the portion of that which is stock, is the portion of the credit card loan that is being used for classic financial leverage...... But again, that is a fraction of 3K, NOT 30K, and it really comes out to be a small fraction of the 3K.

Say if one invested/saved 10 percent, then ten percent of 3K is 300 dollars. So there, buy rolling 3K each time for a full year, and saving 10 percent a year of earnings, and spending all the rest on snickers bars, you have obtained 300 dollars of leverage towards buying financial assets, and have used 2700 dollars worth of leverage to obtain snickers bars.

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Re: If you use credit cards...you are using leverage to inve

Post by madbrain » Wed Jan 22, 2014 6:58 am

techcrium wrote:
Mandrale wrote:What's your point?
My point is that everyone has an optimal amount of leverage that they should capitalize on that is considered safe.


Meaning, if you have $1million in assets, $100 000 a year income....you should have no problem buying another $100K on margin to invest. The chance of the stock market crashing 80% is high unlikely, just as unlikely as people dining and dashing when a restauranteur grants you leverage.
Margin has a carrying cost. The interest rate is not 0%, unlike the credit card grace period when you pay in full. That's a huge difference.

Keeping enough money in an insured bank account to pay the bill at the end of the month and collecting the interest for the duration of that period, is generally considered short-term savings, not investing. You aren't taking any risk doing so.

There is essentially zero risk either on the borrowing side - due to the 0% rate of the credit card, nor on the savings side, due to the FDIC insurance.

This is not leverage.

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Re: If you use credit cards...you are using leverage to inve

Post by madbrain » Wed Jan 22, 2014 7:01 am

ajcp wrote:
mhc wrote:I agree with RyeWhiskey. Take a look at:

http://www.investopedia.com/terms/l/leverage.asp

When I go to a restaurant and eat my dinner before paying the bill with cash, I am not dining on leverage.

When the plumber comes to my house and repairs my hot water heater, and then I pay him when the job is done, I did hot get the job done on leverage.

Having a period of time between a purchase and paying the bill for the purchase is not leverage.
I'll bet you used electricity to type this post that you haven't paid for yet.

Everyone who isn't Amish uses leverage, QED.
I bet even the Amish drink water they haven't paid for yet.

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Re: If you use credit cards...you are using leverage to inve

Post by nisiprius » Wed Jan 22, 2014 7:09 am

I don't get it at all, techcrium. To begin with, assuming you are carrying credit card debt, you are only using leverage to invest if 100% of your money is "invested." Now one can chop logic with that, but usually "using leverage to invest" means "using leverage to invest in risky assets." It is a way of multiplying the risk and return of an investment that is risky to begin with.

Leverage is used by people who like risk and want to make a lot of money in the first place, and think that (for whatever reason) the pros and cons of leveraging up the risk of something is more favorable than they can find just going out looking for risky things. They'd rather bet on 3X the upside of the NASDAQ then on the 1X upside of Brazil. Or something.

So, if someone is 100% invested in stocks and they are carrying a credit card balance then, yes, they are using leverage to invest.

But if a spreadsheet of someone's financial accounts shows that 90% of their money is in various mutual funds in 401(k)'s and brokerage accounts, half stocks and half bonds, and the rest is in banks, and their credit card account is used for convenience to get short-term credit for travel, web purchases, auto-pay monthly bills, and the balance is always less than their cash holdings, then, no, I would say they are absolutely not using leverage to invest.

It's like our high-school civics teacher saying that we create money when we write a check. I suppose it's technically true from the point of view of economic, but what of it?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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