Two Good Reasons to Borrow Money from Your Bank
When people borrow money in today’s financially burdened society they are faced with leverage obstacles never before seen since the depression. People use what they have got to get more, and use both to earn higher investment income in hopes to generate larger capital growth. Not only is this technique effective, it’s also reinforced by government tax policy.
But, what does all this mean?
Basically, if you are going to borrow money, either you a) want to strategically borrow using other people’s money as part of your wealth building program, or b) you need money to pay unexpected costs. These are the only two good reasons to borrow money. Flexibility and choice, however, raises a question you must ask yourself: Which is the better strategy? The answer lies in a list of cautions when using leverage.
If an investment seems to have good potential returns, after taking interest payments and taxes into consideration, you can afford to carry the loan, then borrowing to invest is a reasonable risk.
Wherever you look in the world of investing, it is unlikely you will find something for nothing. The greater the risk you are willing to take, the greater your chance for large profits. When you look at it another way, lending your money, or invest in debt, you expect to receive some benefit in the form of interest. And, you expect to get all your money back at some point.
Simply put, your money is in a savings account, and you are saying to the bank, “I want to lend my money in the form of deposit, but I make no commitment as to how much or how little I will lend, or how long I will leave it with you. I also want you to guarantee to pay me back all the money I put into deposit.” Although the probability that you will get all your money back is very high, your level of risk and return on investment is very low.
On the other side of the coin, for example, if you invest in equity by buying shares of a venture, you are accepting a much higher risk. There is no guarantee of growth, and you could lose your entire investment. Most investments, whether they are in debt or in equity, fall in between two extremes. Only you can decide how much risk you want to take and what kind of risk it will be.
One of the most important things to remember when borrowing money, even if you don’t need the money, is to establish a credit rating. You then repay the loan promptly. The argument is that this will establish you as a good credit risk and will enable you to borrow more easily in the future if you need money for an emergency.
A simple analysis will give you a better idea whether you are in the position to borrow money. Enter the following:
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1. Your monthly gross pay
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2. Spouse’s gross pay
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3. Anyone else gross pay living in the house
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4. Your monthly investment income
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5. Add lines 1 thru 4 and total
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6. Multiply the figure on line 5 by
35% and enter result |
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7. Enter net monthly cost of any current debt repayment program including a mortgage
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8. Subtract line 7 from line 6
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The figure on line 8 is the amount of additional repayment which experts say you could afford each month. It’s based on the commonly used criteria that no more than 35 percent of household gross pay should be earmarked for debt repayment. This is the absolute maximum you should commit to debt repayment. You can try 25 or 30 percent conservatively, if you feel this will not leave you strapped or compromise your lifestyle.
Well managed borrowing can be an immensely powerful way to build your wealth, or take care of unexpected expenses.
