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Should you use your investments to pay for school or fund a business? – CNBC

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Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

Returning to higher education or starting a new business are two lifestyle changes that provide an opportunity to raise your future income potential, but they also require a large upfront investment of money. 

In fact, investors under 55 are likely to pay for their schooling or fund a new business venture by using their investments, a survey by Select and Dynata found. Over half of respondents aged 18 to 54 reported that they invest to fund a business, while over half of 18- to 34-year-olds and nearly half of 35- to 54-year-olds said that they invest to pay for school.

It seems that selling investments to fund these two expenses is quite typical, but is it a smart move? Answering the question really boils down to whether it makes more sense to cash in on your investment gains or borrow the money instead.

“You need to understand what your percentage of interest [would be] on your debt and ask yourself if you can do better in the market,” CFP Bryan Cannon, chief portfolio strategist and CEO at Cannon Advisors, tells Select.

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Should you use your investments to pay for school?

Joe Buhrmann, a CFP and senior financial planning consultant at Fidelity’s eMoney Advisor, suggests that if the student loan interest rate — especially if it’s a federal student loan — is low and attractive, it may make more sense to retain your investments and instead borrow the funds to pay for school. In this case, your rate of return in the market is likely going to be higher than the interest rate you’d pay on your student loans.

Cannon wants investors to keep in mind that the markets over the last 20 years, which experienced two significant -50% bear markets, have averaged gains of 8%+ per year (note that past performance does not guarantee future success). “As a general rule, especially in this low-interest-rate environment, it is not a good idea to cash in investments to pay for school or pay off school debt, especially for younger investors who have a 10-plus year time horizon until they need access to their [investment] funds,” he says.

Let’s use a hypothetical example to see how this could play out. Say you need $10,000 to pay for credits in your last year of grad school, and you are deciding whether to take out a student loan or to tap into your investments to finance this expense.

If you left that $10,000 in the stock market, with the average 8% annual return Cannon identifies, after 10 years that investment would grow to be worth $21,589 (assuming no additional contributions).

Meanwhile, the $10,000 federal student loan you would take out, on a 10-year standard repayment plan with an annual interest rate of 5.28% (the interest rate for federal graduate unsubsidized student loans, at the time this article was written), would end up costing a total of $12,893 after 10 years (assuming you paid the minimum each month).

In this case, taking out a student loan to pay for grad school makes more financial sense than withdrawing the money from the market — you’d rather lose $12,893 than $21,589.

Stuck with a high-interest private student loan and want to pay it off using your investments?

First consider refinancing your student loans through lenders like SoFi or Earnest to score a lower interest rate before turning to your investment earnings. Both offer low rates, no origination fees, flexible repayment terms and economic hardship protection. Once you refinance, the lower rate may mean it’s worth keeping your money in the stock market.

Should you use your investments to fund a business?

The situation, however, may look different when deciding whether or not to use your investments to launch a business.

Taking out an unsecured small business loan without a financial track record could leave you paying a much higher interest rate and it could exceed the return that you might anticipate on your investments, Buhrmann argues. In this case, you could be better off selling some of your investments to jumpstart your new venture. When we say this, we mean investments other than your retirement fund. While you can withdraw money from your 401(k) to start a business, you should first consider the implications that would have on your retirement if your business fails. Plus, you’ll have to pay income taxes and a 10% penalty if you withdraw money from a 401(k) or IRA before age 59½.

And if you’ve already taken out a small business loan and want to pay it off using your investments? “If you took out a loan while inflation was high and the loan had a locked rate, it would make a lot of sense at that point to pay the loan off using your invested capital,” Cannon adds.

The key, he says, is to determine if the annual interest rate you are paying on a loan exceeds the average return on your investments in a year.

Budding business owners take note

Remember that although a new business venture can potentially offer big rewards in the long run, it also comes with a great deal of inherent risk.

“If you sink all of your investments into starting a new business, you will have nothing to fall back on aside from acquiring debt,” Cannon says. “It is important to realize that, in most cases, income is not readily flowing back to a business owner during the first several years.”

If you’re wanting to start your own business, make sure you account for this by having reserves on hand to survive those first few years. “Low capital reserves are often the main reason why new businesses fail,” Cannon adds.

So, if you want to have a cushion in case things don’t go to plan, it can make sense to maintain a healthy emergency fund and not sell all of your investments.

At the end of the day it’s more than just the math

Weighing the potential return on your investments versus the interest rate you’d pay if you took out a loan is an effective way to know if you should use your investments to pay for school or fund a business. However, Buhrmann points out that at the end of the day there are no “right answers” and what works for someone else might not work for you.

“There are mathematical aspects and also behavioral aspects,” he says. “Math and finance might dictate that you should borrow the money to finance the endeavor, but if you’re going to lose sleep or it impacts your health by taking on debt, then by all means, ‘pay cash‘ for the expense and sell some of your investments.”

If you’re someone who is thinking about cashing in some of your investment earnings to fund a lifestyle change, consider speaking with a reputable fiduciary investment advisor who can act as a sounding board and provide guidance.

Catch up on Select’s in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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Will rate hikes dampen Canada's already lacklustre business investment? – Financial Post

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Slow and clear transition to higher interest rates could avoid a negative shock

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With interest rates set to rise, perhaps as soon as March, it’s fair to ask what that could mean for Canada’s lacklustre commitment to business investment, now that loans are about to become more expensive.

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The Bank of Canada held the overnight interest rate at the lower bound of a quarter per cent in its decision on Wednesday, but telegraphed an end to its commitment to low policy rates until the middle quarters of 2022.

Company spending on machinery, software and non-residential property, like factories, was less than 10 per cent of Canada’s $2-trillion gross domestic product (GDP) in the third quarter, down from 13 per cent in 2014, when oil prices collapsed, a shock from which the oilpatch still hasn’t recovered.

The pandemic hasn’t helped, as business investment has continued to shrink amid all the uncertainty created by the global recession that followed COVID lockdowns in 2020, and the worryingly fast inflation that has come with the recovery.

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So as central banks in Canada, the United States, and elsewhere move to tame price pressures by raising borrowing costs, there’s a risk that higher interest rates could dampen investment intentions. But economists said that Bank of Canada Governor Tiff Macklem probably can avoid a negative shock to business sentiment by communicating clearly and ratcheting up borrowing costs slowly.

“Business investment is going to recover somewhat and that’s not really a brave call,” Pedro Antunes, chief economist at the Conference Board of Canada, said in an interview. “It’s just that we’re at such low levels, it’s bound to recover.”

Business investment is going to recover somewhat and that’s not really a brave call

Pedro Antunes

Until the first quarter of 2014, business investment in the U.S. and Canada was roughly the same in terms of its share of GDP. Since then, the story has been dramatically different. The capital expenditure of U.S. companies was nearly 15 per cent of economic output in the third quarter last year, suggesting the U.S. economy has become more competitive during the pandemic.

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A lack of investment, historically, has translated into slower labour productivity growth, with Canada posting annual gains of one per cent on average from 2000 to 2019, whereas the U.S. saw growth of 1.7 per cent.

Even if Macklem opts to tap the brakes, a series of interest-rate increases probably wouldn’t discourage businesses, given they are sitting on mountains of cash, said Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce.

Firms have accumulated more than $130 billion in excess cash since the start of the pandemic, and are likely holding off spending it until executives have a clearer vision of the road ahead. A straightforward message from the central bank about how it intends to confront inflation could boost confidence over the near term, Tal said.

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“It’s really the message from the Bank of Canada that they are not behind the curve (which) can help businesses down the road by improving confidence,” he said. “If you are a CEO, you’re taking a very conservative approach towards spending money in this environment because you don’t know where we will be six months from now.”

The central bank is confident firms will spend on operational upgrades once pandemic-related weaknesses subside, it indicated in its Monetary Policy report published on Jan. 26.

Tiff Macklem, governor of the Bank of Canada.
Tiff Macklem, governor of the Bank of Canada. Photo by David Kawai/Bloomberg

“Outside the oil and gas sector, firms are expected to increase their investment in the face of growing domestic and foreign demand, improved business confidence, limited production capacity and the gradual easing of supply constraints,” policy-makers said in the report.

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The past year has been more chaotic than clear for executives. Companies have had to grapple with a deadly virus, soaring inflation, and supply-chain bottlenecks. Macklem and other central bankers initially said the burst of inflation that came with the recovery would be temporary, and then relented as price pressures continued to build. Canada’s consumer price index surged 4.8 per cent in December from a year earlier, the biggest increase in more than 30 years.

On top of that, immigration stalled because of travel restrictions, exacerbating a labour shortage that produced nearly 900,000 vacancies in 2021 even as overall employment returned to pre-pandemic levels in the fall. There’s hope on the horizon with the Omicron wave seeming to have peaked in some parts of the country, but anxiety still abounds among employers, said Antunes.

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Broad-based investment intentions signalled in the latest Business Outlook Survey suggest the tides could change coming out of the pandemic, especially as firms look to rebuild inventories eaten up by hot demand and supply-chain clogs.

  1. Canada added 886,000 positions in 2021, a record and a faster return to normal than in the United States.

    Canada’s U.S.-beating jobs recovery might not be as great as it looks

  2. 'Without immigration, we would be going backwards,' says CIBC World Markets' Benjamin Tal.

    Immigration surge could slow Bank of Canada rate hikes

  3. Tiff Macklem, governor of the Bank of Canada, during a news conference in Ottawa on Dec. 15, 2021.

    Debt-strapped Canadians brace for risky rate-hike cycle

  4. Bank of Canada Governor Tiff Macklem.

    Bank of Canada holds interest rate at 0.25%

It’s also possible that investment isn’t as sluggish as headline numbers suggest.

COVID-19 has quickened the pace of technology adoption, especially among professional service industries, which tend to deploy less capital per worker. Some of those positives might not be fully captured in data, especially among technology companies, which focus their business investment on people and research and development, said Martin Toner, director of institutional research at ATB Capital Markets Inc.

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“That’s where the vast majority of capital being raised by startups goes. It mostly goes into people and research because this is all intellectual property,” Toner said.

The state of the labour market could be giving businesses another reason to invest. All those unfilled positions could put upward pressure on wages, lowering the trade-off between buying productivity-enhancing equipment and hiring more workers.

“Corporations will not sit and do nothing,” said Tal. “Now labour is expensive, unavailable. People will switch to investing in capital.”

• Email: bbharti@postmedia.com | Twitter:

Listen to Down to Business for in-depth discussions and insights into the latest in Canadian business, available wherever you get your podcasts . Check out the latest episode below:

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Crypto money laundering rises 30% in 2021 -Chainalysis

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Cybercriminals laundered $8.6 billion in cryptocurrencies last year, up 30% from 2020, according to a report from blockchain analysis firm Chainalysis released on Wednesday.

Overall, cybercriminals have laundered more than $33 billion worth of crypto since 2017, Chainalysis estimated, with most of the total over time moving to centralized exchanges.

The firm said the sharp rise in money laundering activity in 2021 was not surprising, given the significant growth of both legitimate and illegal crypto activity last year.

Money laundering refers to that process of disguising the origin of illegally obtained money by transferring it to legitimate businesses.

About 17% of the $8.6 billion laundered went to decentralized finance applications, Chainalysis said, referring to the sector which facilitates crypto-denominated financial transactions outside of traditional banks.

That was up from 2% in 2020.

Mining pools, high-risk exchanges, and mixers also saw substantial increases in value received from illicit addresses, the report said. Mixers typically combine potentially identifiable or tainted cryptocurrency funds with others, so as to conceal the trail to the fund’s original source.

Wallet addresses associated with theft sent just under half of their stolen funds, or more than $750 million worth of crypto in total, to decentralized finance platforms, according to the Chainalysis report.

Chainalysis also clarified that the $8.6 billion laundered last year represents funds derived from crypto-native crime such as darknet market sales or ransomware attacks in which profits are in crypto instead of fiat currencies.

“It’s more difficult to measure how much fiat currency derived from off-line crime — traditional drug trafficking, for example — is converted into cryptocurrency to be laundered,” Chainalysis said in the report.

“However, we know anecdotally this is happening.”

 

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Himani Sarkar)

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Alberta Enterprise Corporation announces $31.2 investment into Albertan companies – Fort McMurray Today

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The Alberta Enterprise Corporation (AEC) has announced a $31.2 million investment into Albertan technology and health innovation companies to grow. AEC is an investment firm which from 2008 has received over $350 million from the Albertan government to then invest in venture capital funds; so, Alberta’s early-stage tech start-ups and entrepreneurs can access the money needed to fund their operational and administrative costs that exist when growing a new business.

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AEC is investing this $31.2 million into three venture capital funds: Builders VC, Yaletown Partners’ Innovation Growth, and Amplitude Venture Capital.

This sizeable investment will help diversify the Albertan economy away from dependence on mining and energy production. According to the Canadian Venture Capital Association Market Overview for Q3 2021, Alberta already ranks 4 th , provincially, as Canada’s largest tech hub, calculated in terms of dollars invested and deal volume.

Moreover, as of Sept. 2021, Alberta had already surpassed the previous year’s amount of venture capital investment by 5.5%, in terms of dollars invested, and 20% for volume of deals made, setting 2022 on the path to be a record-breaking year.

This $31.2 million investment made by the AEC is part of the provincial government’s $175 million recapitalization of the AEC to make it a key component of Alberta’s post-pandemic economic recovery plan. In response to the investment announcement Doug Schweitzer, Minister of Jobs, Economy, and Innovation said, “Alberta continues to see exponential growth in venture capital investment, helping to solidify our province as a hub for technology and innovation.

We are building on this momentum by ensuring Alberta start-ups, including those with expertise in artificial intelligence, machine learning and other technologies, have access to the capital they need to grow. This investment will help our economy rebound and diversify while creating jobs for Albertans.”

 

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