4 ms·

Your scenario meets the definition of 'using margin as a financing option'. It is the same as the overdraft option provided by credit cards, only it is more da

Your scenario meets the definition of 'using margin as a financing option'. It is the same as the overdraft option provided by credit cards, only it is more dangerous since in the margin call scenario they actually liquidate your stocks without asking you (if I recall from reading up on how this works at most discount brokerages a few years ago). The fact that you rarely do it helps some but as we know the thing about rare events is they happen every day :). I have held myself to a "current ratio" of over two, which is considered 'healthy' by most finance people when evaluating businesses. I would encourage everyone to calculate their current ratio and make sure it is ALWAYS over two as well. It's literally the current assets (cash you could get access to in a year) divided by the current liabilities (all expenses due in a year). Easy to calculate and immensely freeing once you decide it's a rule you'll never break.

deleted 9y ago
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radiorental 9y ago
Small point but I think you might mean Liabilities divided by Assets = 2. (aka the 6 month rule) > It's literally the current assets (cash you could get access to in a year) divided by the current liabilities (all expenses due in a year) Essentially you should have a 6 month runway. If you have 25K cash and 50K costs per year then the $25K will buy you 6 months to get yourself over a layoff/health issue/etc. Just a small point because it's a rule I live by and you freaked me out for a moment thinking the advice/goalposts had move way beyond what I've saved for. thanks
- jonbarker 9y ago
  No, the numerator is current assets and the denominator is liabilities. This way if you have half of what you are about to spend in a year, your ratio is .5. If you have double what you are about to spend in a year, your ratio is 2. In your example, your current ratio is .5. Still you are doing way better than most people I know and the stats on national savings and lifestyle requirements bear this out as well.

deleted 9y ago

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radiorental 9y ago

Small point but I think you might mean Liabilities divided by Assets = 2. (aka the 6 month rule) > It's literally the current assets (cash you could get access to in a year) divided by the current liabilities (all expenses due in a year) Essentially you should have a 6 month runway. If you have 25K cash and 50K costs per year then the $25K will buy you 6 months to get yourself over a layoff/health issue/etc. Just a small point because it's a rule I live by and you freaked me out for a moment thinking the advice/goalposts had move way beyond what I've saved for. thanks

jonbarker 9y ago
No, the numerator is current assets and the denominator is liabilities. This way if you have half of what you are about to spend in a year, your ratio is .5. If you have double what you are about to spend in a year, your ratio is 2. In your example, your current ratio is .5. Still you are doing way better than most people I know and the stats on national savings and lifestyle requirements bear this out as well.