Leverage and Debt

Basics of Borrowing

Borrowing for Consumption 

The typical person is not able to beat the banks at their own game. Just like playing the lottery or the slots, the house usually wins. Otherwise they would not be in this business! 

Borrowing regardless of the use, means you usually end up behind not ahead. Despite what others may lead you to believe we should not kid ourselves. 

9 times out of 10 we borrow due to unwise financial decisions at some point in our life. Instead of saving and investing for things that we need, we spend on things we don't need.

Now when we need big ticket items such as a car or a house repair, our pockets are empty. Sadly in today's reality things are mostly about appearances. However, there is a big difference between being able to afford something and being able to borrow for it.

Borrowing and obtaining an expensive luxury car may make us feel like we are doing well. We are lying to ourselves. This extra debt means a future with less money, because the loan is an additional expense.

The additional monthly expense is not the only hole we dug. We are even more dependent on our job and our boss, because we are forced to work more years before the loan is paid for.

Only use credit cards to build your credit profile. Pay the bill in full and dont pay interest!. You may need the credit profile for a big purchase like a home. 

Never abuse credit cards and debt and understand all the terms you agreed to. It's easy to forget to pay a bill before the interest is charged. 

Borrowing for Investment 

Stock Margin, Real Estate Investments, Business

When we borrow in hopes to magnify our returns, we incur a significant risk that is often not accounted for. Always think about risk adjusted returns. To borrow in hopes of magnifying returns is not a free lunch. 

When things go south, and they do, the losses will be magnified. Like Warren Buffet says “Only when the tide goes out do you learn who has been swimming naked.” Things look great on the surface, and they may for a brief period, until we hit a slowdown in the economy.

It's difficult not getting excited about doubling or tripling your returns, however it is important to remember that the real world has thousands of variables, this is unlike a math equation which might only have a couple.

Borrowing funds to invest in the market, a property you found, or a new business should be avoided. Find a way to grow organically, and you will be rewarded. 

If you can't find a way to make money with just your own capital, what makes you think you will do better when you have more money?.

Solutions

Learn to sleep on it before committing to a loan. Hopefully when you wake up the next day you will realize that the fancy BMW will not make you that much happier. 

We all want nicer things, and it's understandable to want to splurge from time to time on wants. So save and invest until you can afford to pay for the item with money you actually have!. 

And don't be a slave to the lender!. And don't make the rich even richer!. 

Live below your means, PAY YOURSELF FIRST!. And if you wish to start a business, start small (the internet is a good tool for starting a side hustle when you have little or no money).

Over time, if you succeed, roll over your profits and grow your side hustle into a full business. And with time you will have a successful cash flowing business.

In the end you will be happy you built your financial life on a solid foundation!.