Image Credit – Half-Full Glass of Water – by Wikimedia
We all know the classic and timeless argument – Is that glass of water half-full or half-empty? I want to extend this analogy to your brokerage account and its margin loan facility. In this case, that glass of water is indeed almost full!
Let’s go with a small example; You open a brokerage account with $10K and buy the VTI ETF fund. You also open the margin loan feature, but otherwise, you’re not using it at the moment. That glass of water is actually $20K.
You have another $10K ready to tap for stock buying opportunities. Or a quick $10K loan for your personal needs. In actual practice, that glass of water really isn’t $20K. It’s probably less – there are restrictions on buying power during the day vs. overnight. It is probably a Reg-T account, which establishes borrowing limits. Even the underlying stocks may reduce margin – i.e., holding UPRO will curtail margin considerably.
Emergencies and Opportunities
Here, I talk about holding a stash of cash for emergencies and opportunities that may arise in your ordinary course of living. Most people hold up an X amount of cash in reserve, usually up to 6 months worth of living expenses. And what if you discover an exciting opportunity? What if you find a perfect home that just suddenly became available for sale? A crashing stock? An exciting vacation opportunity?
For me, holding thousands of dollars in cash for emergencies costs me too much in terms of opportunity cost. I need to stay invested at all times. My bank account fluctuates between $1-2K per month. I use zero based budgeting to ensure that I account for my expenses and still contribute to my investments every month.
Yet, emergencies still happen. One time, I had to purchase a new set of tires and replace brake pads. Another time, my HOA gave me a surprise one-time assessment. I had a medical bill not covered by insurance. I am already dreading the next emergency.
I am always looking for a forever home. I realized that late 2020/early 2021 was the best opportunity to purchase a forever home, and I’m still kicking myself for missing that! Recently, I had a chance to go on a summer vacation at a vastly discounted price. I took it, and it was well worth the cost, which was in the low thousands! I need to be ready for opportunities as they may present.
Enter the Margin Fund
This is where your brokerage’s margin loan facility can help your overall financial situation, while staying fully invested. If an emergency pops up, you simply withdraw funds from your brokerage’s margin loan facility. You take care of the emergency, and then repay the margin loan over time.
The same rationale holds true for opportunities. Found that perfect home? Withdraw from your margin loan facility, buy it with cash, and then do a cash-out refinance mortgage to repay the margin loan. Cash buyers are stronger buyers in competitive real estate markets. An epic vacay package just opened up? Just withdraw from your margin loan. Repay over time. Etc.
Yes, there are risks in using margin. Your stock holdings could quickly go down in value, and you get margin called. The margin loan interest rate could skyrocket, making it expensive. There are also opportunity cost and inflation risk in large cash holdings preserved for emergencies.
Conclusion
I’ll admit that I drank too much from this half-full glass of water. 🙂 I used my margin loan facility to buy the dips in the stock market. Unfortunately, the stock markets went south in 2022. During that year, I had to pay off expiring CC’s and suffered some emergencies. I couldn’t use my margin loan facility at all. Luckily, I had CC’s to cover these expenses. I used CC balance transfer offers as well.
It is 2023, and I am unwinding my CC spending binge. I am also paying down the margin loan facility, so I have some ’empty’ space there for emergencies. Replenishing my margin loan this time around has improved my personal financial situation. Unfortunately, I still have elevated margin interest rates to contend for the time being.
The usual disclaimer applies; This blog article is for entertainment purposes only. No express or implied warranty is offered, regarding any actionable information contained in this article. Laws governing investing are complex and varied. Personal finance is personal to you – no one else knows about your financial situation intimately. I encourage you to read and study information from other financial sources to gain the knowledge and expertise needed to manage your finances.
