People happily borrow to buy a car, house, new TV or to go on vacation. At the same time most of us feel unsure to borrow money for investing or building a business because it’s so much riskier. At least that’s what we usually think.
But how exactly do you secure your money when buying a car? Sure, the car may improve your lifestyle, but it is not an asset. You don’t make money from it. Instead, it costs you extra money for support and fuel.
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Compared to that even the worst investment is less risky. Even if you lose all the money in a risky investment (unlikely to happen), you are still ahead from buying a car – because you don’t have further expenses.
But when investing, you don’t plan to lose money – your idea is to make more. Then why do people so easy borrow money to buy a car, but are afraid to do it for investing?
What’s The Point To Borrow For Investing?
All the books and blogs about investing teach you one thing: get out of debt!
Why the heck am I telling you to get into debt then? Isn’t this against all principles of financial success and personal wealth creating?
[ad#image-ad] Yes and no.
There are bad loans which are putting you in the rat race. These are loans that you take to buy stuff which doesn’t put anything in your pocket. Bad loans are loans which you use to buy liabilities.There are good loans – the loans that you use to buy assets. payday loans
The answer when it’s worth it to get a loan for investing is simple – when the ROI of your investment is higher than the interest you pay on the loan.
It’s really that simple. It is how the business world works – most companies and even small businesses do not start with own money. They borrow – from friends, relatives and banks. Then why is it so strange to get a loan for investing? (Except that it may be illegal sometimes. Some countries have regulations which forbid using borrowed money for some kind of investments)
If you have found an investmend that yields 10% per year, you can get a loan with interest 6% per year and earn 4% from nothing. This is the way to leverage your money and actually win a lot more than 4% profit. See this example:
Sandra is an accountant in a middle sized company. She gets a good salary and owns a small home, but can hardly save more than $200 per month and has $10,000 in savings right now. If Sandra build a good stock and precisous metal portfolio which can yield 10% per year, she has some chances to be a millionaire soon.
With her current savings and salary, it would take her about 31 years to achieve that. Quite a long time.
Let’s think this way. Sandra’s home is worth $100,000 (it’s a small home ater all). She can get a $50,000 mortgage loan for it at 6% p/a for 30 years. The monthly payment goes exactly to $300, so she can afford it. Instead of investing her extra money each month, they will have to go for the mortgage payments.
But she will have $50,000 right now to invest in her balanced low risk portfolio yielding 10% annually. This way even without investing a penny monthly, she will be able to reduce her way to the million with 3 years and have it in 28 years. That’s 10% improvement by taking a loan.
If Sandra’s portfolion could yield 20% per year (dreams, dreams…), the difference becomes even bigger. She would need 18 years to achieve the million without loan and only 14 years with a loan.
Borrowing money can significantly improve your investment strategy it’s a must-do in your overal investing efforts.
Ways To Borrow Money For Investing
Depending on where you live not all of the options may be available, but there is always a way around. You can easy use a loan for something that you would normally pay with own money and then use your money for investing.
- Mortgage loan. If you own a property you are in best position (oh well, you are except at the time of crazy real estate crisis like now). The banks will happily give you loans at a very good rate.
- Other bank loans. Of course the banks and credit institutions will happily give you all kind of other secured or unsecured loans, because that’s their business. Of course you won’t be able to get as good rate as with the mortgage loans, but if you have a good investment opportunities this is the way to go.
- Borrow from friends and relatives. This is the best option (if you have such friends), because they will likely borrow you money they don’t need.
- Advanced payments, leasing etc. It’s usually not recommended to buy stuff on leasing because that puts you in the rat race. But if you anyway planned to buy that stuff why not use the leasing, considering the interest is lower than the ROI your investment brings?
- Borrow from “Angels”. This is a bigger concept that I am going to discuss separately. But in short, if you can find an angel to fund your business ideas, go ahead!
Loans are just one of the instruments to leverage your money. Adding several instruments one by one can lead to the huge impact that you are looking for.