As a hungry college student in the 1980s I frequented a family restaurant that bragged an all-day breakfast deal. For $1.99 I could get two eggs, two slices of bacon, two slices of toast and a glass of orange juice.
This was handy for a busy, cash-starved student. Also helpful was the stack of condiments at each table. Peanut butter has food value, and in this case, it was free.
As any hungry student will tell you, you can spread an entire mini-pack of it on a half slice of toast, then cover it with jam or honey (also for free), and voila! cheap body filler - like Bondo for the belly.
As customers, we students were an undesirable expense, sitting and studying for hours, consuming our body weight in free spreads.
But for most of us, that slurping, chewing, sucking sound is not a hungry college student wolfing down our peanut butter... Ok, maybe it is, but the more pernicious life-sucking force that sticks to the roof of our mouth is debt interest.
Every other expense buys us enjoyment of some sort. Food tastes good, housing is an essential cost, clothing, entertainment, transportation, junk food - all provide us with some utility.
Even paying taxes brings a grudging sense of self-esteem as we contribute toward our share of the burden of running the state.
Although interest is a necessary evil in the case of a home, or perhaps a student loan, most of the time it is like consuming Twinkies. It briefly satisfies a craving, but leaves one feeling bulimic.
Tolerable interest
While it may seem as unlikely as a nice-looking toupe, there are cases where interest can be a pretty-good idea. For example: An owner of a stand-alone restaurant, having purged her shop of peanut butter Hoovers, turns it in to a successful concept and wants to franchise it.
She has scarce resources and knows that she can generate a 15 per cent return on invested capital after all costs excluding interest.
Of course, the debt load must be within manageable limits, but in her case it is worth it to borrow at say five per cent in order to multiply her earnings.
Bad interest
Interest generated for non-essential extravagances, is little more than a tax on impatience. Paid for in after-tax dollars, it eventually leads to disappointment.
That flat screen TV or hand-held electronic toy can wait. If we do the math on the final cost of carrying the debt, we find that it's not worth it.
Don't kid yourself that you are buying it for the kids. Your kids will find more joy playing with the box it came in, just as we once would have done.
Want to be a real hero to your kids? Go grab a big box at a "big box" store and bring it home empty. If your kids are past that imaginative stage, open them a savings account and let them build toward a dream of their own.
They'll live to thank you for it, and will learn a more dignified meaning of the much-slandered concept of "entitlement."
Good interest
The kind of interest that you earn is like a patience dividend. It is in short supply right now with rates low and budgets stretched.
But if you become a net lender, the difference between what you earn and what you pay in interest, (known as the spread) can work in your favor, rather than against you.
Still, even good interest is inferior from a tax perspective to share dividend income or capital gains. Unless interest income is shielded from tax, (such as registered funds), or written off against business income, it is treated as regular income and taxed accordingly.
Which side of your bread will you spread?
Mark Ryan is an advisor with RBC Wealth Management - Dominion Securities, (member CIPF) and can be reached at mark.ryan@rbc.com.
