Putting Kid$ Through University
(Saturday 11:30 a.m.)
I was talking with Jane this morning over pancakes and coffee - our usual Saturday morning routine, where I get up, make the coffee and pancakes....

She mentioned that many in mid-life are now paying for more than one child to attend university and that this was a daunting feat for those who were already stretching the budget thin. As a financial adviser, I have noted how this one element of middle class family life can become an underlying stress factor for a family -the proverbial straw to the camel's back.

Most financial advice one will receive has to do with saving for retirement through an RRSP. If one tries to take money from that vehicle there is a big penalty.......and we don't even know if we will make it to age 69. So while there are obvious benefits in the RRSP program, there are also opportunity costs that one must endure while that money sits there accumulating for "retirement".

I thought I would write about one relatively safe way of financing some of the education cost if you don't have the money available for this purpose.

If you are interested in exploring this strategy further, since everyone's situation is unique, I would suggest you talk to your adviser first or call me during office hours at 450-201-1724. You can even have your adviser call me.

This method might also be used to reduce and pay yearly taxes or for up-grading the home.

Many will already be familiar with using a home equity loan - but most people only know to pay the loan from their earned income (out of pocket). There is another way.

What if you created an investment with the loan first and had the FIXED monthly dividend from that investment pay off the monthly loan and leave you enough to pay for tuition? Then when the need for tuition is gone in a few years, cash in the investment and pay off the lower balance of the loan? You then keep the difference and take a vacation.

The benefits are:

a) Paying for tuition from an investment.
b) Having the investment pay off the loan monthly...
C).. from cash flow that is not coming from your employment earnings or RRSP savings.

D) You might consult an accountant and find that the interest of the loan during the year, may be used to reduce taxes.

The key to the strategy is the use of a monthly fixed income investment (NON DSC or "Deferred Sales Charge") and wholesale or "zero commission" cost by the investment investment adviser.

If you live in Ontario or Quebec, I can help set this up. (Outside of those provinces I could perhaps link you up with an adviser who would help you with this.)

Modest Example

Based upon owning a paid off home worth $175,000 or more IN CANADA.

A) A $110,000 home equity loan invested at a cost of $10.00 per unit/share.

B) Equals = 11,000 units that each pay 8 cents per month ($880) to your bank account at month end. (use a high yield bank account "no fees or cost").

C) Pay the bank loan the approximate cost of $650 / month, leaving you $230.

D) To strengthen the investment compounding and 'pay-out' power, reinvest $50 per month from the $230 buying, approximately 5 more new units every month which will simply increase your monthly payout (monthly raise!) and increase the number of unit shares you own.

E) This leaves you with$180 per month (x12) or $2160 per year to contribute towards tuition/books/transport or boarding costs.

F) All the while, the loan is being paid off by the monthly investment dividends and not by your cash flow that is already being used for your cost of living.

If you have a home worth more, you could even go for more, say $200,000 which would pay out $330.00 per month (or $3960 per year) net of loan cost.


What are the RISKs?

Market Risk
Even if the market drops and the investment value goes down for a while, there is no "call" on your owned unit / shares. The bank is only concerned that the loan is paid every month.

Since you do not sell the units and only "hold" them, they keep paying your loan.

Investment Company Adjustments
One risk is that the investment company might one day decrease the fixed payout (or increase it - but that is good and not a risk.)

If this reduction does occur it will eat up the reinvested portion ($50) every month and perhaps decrease your disposable amount for tuition somewhat. But this is not too bad a problem and still enables the monthly allowance even if reduced.

Interest Rates
Another risk is that interest rates on the loan will rise.
So you use a 5 year 'fixed' 25 year amortization and not a variable loan.

Then if you wish, pay it off in 5 years with the investment balance.

Or keep it going and re-invest the amount that was going for tuition that has been eliminated. You can then even use it to buy a new kitchen or new car...whatever...

What if the Investment stays the same value or goes down?
Well, if you have a value of $100,000 after 5 years invested (having invested a loaned amount of $110,000) and paying out to you all those dividends, you can still pay the balance of the loan and have some left over... to perhaps pay for an Insurance Policy to cover possible future problems while you are alive if you are ever diagnosed with something serious...or you could contribute to your Grand Kids RESP...
Not bad.

If you have questions, call me or your financial adviser.

It is a tool that is being used by many right now.

Keep in mind that investment is not simply about gambling in the "market".

There are many kinds of investments ranging from risky to not risky.

Just like doctors with medicine, you have to use the right medicine to address the right problem. So too with the world of investment. The strange and wonderful thing about this "tool" is that you make more in cash per month as the "market" goes down!

(Saturday 2:30 PM)
I added something above .
You'll notice I write things and then if you look again a little later, the diction, or message may have changed somewhat due to afterthoughts. In today's case, it's due to procrastination. I am really supposed to be doing chores like cleaning the electronic filters... but then I get a thought and come back here to write it down.

Writing to me is like golf to my friend Bob H.
L