One of the world’s most successful investors, Warren Buffet, achieved his success through borrowed money. Surprised? You should be. In previous letters to shareholders, Buffet has claimed that it’s not a good idea to use borrowed money or debt to pay for stocks. However, it’s hard to take this advice seriously when the person giving it is known for building his wealth from nothing.
Sometimes, if you want to make money you need to be willing to take risks. There’s no better example of this than Warren Buffet, who leveraged loans with a good interest rate, to take advantage of cheap, safe, and high-quality stocks. The long-term results speak for themselves. Today, Warren Buffet is one of the richest men in the world.
Of course, not everyone will be able to win big with borrowed money. The results you get when you invest in stocks, Forex, or any other security can vary depending on a range of factors. However, it’s safe to say that investing with borrowed cash might not be something you should rule out entirely.
Most People Already Invest with Borrowed Money
The truth is that many people have a warped perception of debt. It’s easy to assume that all debt is bad, but the truth is that most of us will end up borrowing money at some point, whether it’s for a mortgage or a car. In some cases, you could even argue that even borrowing money for a house is “borrowing for investment.” You buy your property with the hope that one day you’ll be able to sell it for a larger amount, after all.
The key to making sure that you borrow money correctly is ensuring that you compare your options carefully. If you can ensure that you’re getting the lowest possible interest rates, and you have a safe, low-risk investment to get involved with, as Buffet did, then borrowing to invest could be a good choice.
Many modern investors are already using some form of leverage to improve their everyday returns. For instance, if you have a mortgage and you’re also investing in an IRA or a 401k plan, then you’re technically using borrowed money to invest. Instead of paying off what you owe, you’re spending money elsewhere. Borrowing to invest in the stock market is obviously something of a different process, but similarly, it can have its benefits.
Ways You Can Borrow to Invest
There are many different ways that you can borrow to invest in the United States today. For instance, the most obvious option is to simply take out a line of credit or a loan that you can put into the stock market. It’s not a good idea to do this until you’ve thoroughly evaluated your situation and made sure that you can pay back your loan according to the terms. However, when used carefully, loans that allow you to invest in excellent opportunities may be a valuable way to boost your wealth.
Other options including borrowing against the equity in your home or your car. Refinancing a mortgage or taking out a new mortgage is a common way to fund investments. The idea is that in the long-term, the investment will cover the expenses of the loan and related borrowing costs while generating extra income for your future too. Of courses, as with any secured loan, your home may be at risk.
Other, more specialist ways of “borrowing to invest” include buying on margin – which is when you borrow money from an investment firm to pay for your securities. This can be a riskier endeavor than simply taking out your own personal loan. There’s also the option to short sell stocks, which means borrowing shares from an investment firm because you believe the price of a stock is ready to fall.
What to Consider When Borrowing to Invest
All investments come with their risks, whether you’re buying a house that you hope will be worth a fortune thirty years ago, or you’re playing in the stock market. The key to success is having as much information as possible. Comparing the interest rates of your loan will help you to get a better deal, as will understanding your level of debt. If you’re already paying a lot of interest on your credit card debts, then you might need to pay this down before you take on additional loans.
Remember, it’s also a good idea to check things like when you need to pay back the loan, and what kind of terms your lender is willing to offer.