Borrowing money to invest in stocks or bonds (leverage) can be a secure, effective way to achieve your financial goals. These four money tips are from a financial expert and author…
“The most conservative of professions – the government employee or the tenured professor – which the attract the most risk averse among us, are ideally the investors who should be taking on the greatest amount of investment risk, if only they looked at their entire personal balance sheet as opposed to just their liquid investment account,” writes Moshe Milevsky in Are You a Stock or a Bond? Create Your Own Pension Plan for a Secure Financial Future.
Should you leverage, or borrow money to make money? Read Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial Future for more info.
And, here are Milevsky’s tips for borrowing money to invest in stocks, bonds, or real estate….
1. Make sure your return is higher than your interest rates. “Debt for investment purposes makes perfect sense,” writes Milevsky. “Just ensure that the interest you are paying on your debt is less (on average) than the return you are earning on the borrowed funds.” This financial experts encourages us to see leverage, or borrowing money to invest, as not evil or wrong – but rather an effective financial strategy.
2. Be prepared to withstand financial shocks or overcome bad investments. When you’re borrowing money to invest, you’re increasing the chance of financial upsets. Make sure you can withstand these shocks – such as by having the funds to cover the interest payments during turbulent times.
If you invested poorly, read How to Bounce Back From a Bad Financial Investment.
3. Remember that the best loans are those you don’t need. “If your human capital is more bond-like, for example, if you have a secure job with a predictable income stream, you might be overexposed to bonds and hence might be able to afford to borrow money to invest, even if you don’t need the loan,” writes Milevsky. If you’re struggling with debt and can’t afford your mortgage, rent, or credit card payments – then leverage may not be your best option.
4. Don’t be afraid to take debt to your grave. If your house is worth $500,000 and you owe $200,000, then your personal equity is positive. Net worth is what matters – as long as the personal equity on your balance sheet is positive.
Read Making Enough Money to Retire – 8 Tips for Increasing Retirement Income for info on retiring happily wealthy.
Milevsky urges readers to pay particular attention to the leverage ratio (the amount you borrow to invest, expressed as a percentage of your original equity or capital) and the borrowing interest rate (after-tax rate of interest on the borrowed capital).
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