Ways To Borrow To Invest
Borrowing to buy investments can be an effective way to boost your potential returns. This is called using leverageLeverage A way to make a larger investment by using borrowed money to invest. The more you invest, the more money you can make. But if things dont work out, you will have bigger losses.+ read full definition. As long as your investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition increases at a rate that is higher than your borrowing costs, you can make money. But taking on debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition involves more risk than paying for an investment outright with cash.
Invest In Mutual Funds
Mutual funds are another stock market investment you can use to turn money into more money.
Investing in a mutual fund is a great strategy for long term investors because it allows you to invest in a number of different assets at once.
This will help you to achieve a well-diversified portfolio that will protect you from any one asset dropping in price.
Mutual funds tend to have higher fees than other investment options, but they can also perform better than their competitors.
Mutual funds can return anywhere from 7% to over 15% depending on the fund.
If you have a low risk tolerance and want to invest in the stock market, owning a mutual fund is a great option.
You can use an investing app like M1 Finance to get started!
Using Debt To Buy A Home Or Property To Rent
A home is considered an asset that you can maintain, upgrade and leave to your children when youre no longer around. When you have a second property, like an apartment that can be rented out, it can be a great way to generate an additional income.
Owning any type of real estate is what most of us strive to accomplish in life, but few can afford to buy a property without incurring debt. A home loan from a bank is the option most people choose when buying a home and they usually have a term of anywhere between 20 to 30 years, which makes the repayments realistic. When you use debt to buy an asset that can increase in value, youre making a wise move as you build generational wealth.
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Invest In Rental Properties
Rental properties are a great money making machine you can take advantage of to make extra money.
Many investors have turned a few rental properties into massive empires with huge returns.
Youll need some capital in order to purchase a rental property, but it can be a great way to turn your money into more money.
To get a mortgage for your investment property youll need to have at least 20% for a down payment and the income to support the mortgage in case your tenants do not pay.
Investment properties can make money through several ways:
- Rental appreciation
- Mortgage pay down
The annual rate of return can be greater than 20% in many cases depending on your investment.
Shorten The Length Of Your Loan
Refinancing your debt to a shorter term may help you pay it off faster and save on the total cost of borrowing. You may be able to qualify for a lower rate, or a shorter or longer loan term, depending on your situation. Remember, shortening the term of your loan could increase your monthly payments.
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The Differences Between Good Debt And Bad Debt
Its important to understand what we mean by good debt and bad debt.
Good Debt is the type that allows you to accumulate assets that will increase in value the loan interest is often tax deductible, and you can use the income derived from the asset to repay the debt.
Examples include:
- Investing in managed funds
Bad Debt is the type that buys goods, services or assets that have no potential to generate any income and/or depreciate in value. The loan interest is non-tax deductible, and there is no income from the asset to pay back the debt.
Examples include:
- Personal loans to buy cars
- Most family home loans
Invest In Index Funds
Index funds are a great stock market investment to turn money into more money without doing any work.
With this investment, you simply put your money into a fund that tracks a certain market index, like the S& P 500. This gives you exposure to a broad range of stocks, and as the market goes up, your investment will too.
Index funds typically yield around 7% to 10% depending on the year making them a great appreciating asset to build wealth and make money.
To purchase index funds, I recommend using an investing app like Acorns or M1 Finance. With Acorns, you can invest in a variety of stock market assets to grow your money and earn passive income. As a bonus, youll get $10 completely free to start investing when you create an account with the link below!
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Borrow A Modest Amount And Invest The Proceeds
Imagine two investors, Ashley and Esther. They each have no debt and a $100,000 stock portfolio fully invested in the S& P 500. They just got a hard-earned promotion and a raise. After more spending, they’ll both have $200 left over every month, and they’re deciding what to do with it.
Ashley invests $200/month in the S& P 500, earning 8% per year. Nothing wrong with that, and she earns $9,000 more than someone who puts it all in a checking account after 10 years .
Esther, having seen the power of investing to build her portfolio, decides to use debt to amplify her returns. Instead of directly investing, she sets aside the extra $200/month for future loan payments, keeping her debt well below 36% of her income.
With a good credit score, she obtains a $20,000 loan for 10 years at a 3% fixed rate. This will cost her $193/month to pay every month for 10 years, at which point she’ll be debt-free again if she chooses.
Then she invests the loan into the S& P 500 Vanguard ETF and earns 8% returns over the next decade, ending with $43,000 and no debt.
Esther was able to invest $20,000 up front and enjoyed compound returns, growing it to $43,000 after a decade. Because she received a big sum and invested that in her first year, she could use her extra $200/month to pay down her loan.
As a result, Esther has $9,000 more than Ashley in her account, just from a $20,000 loan. Rather than just investing her extra money, she found a strategy that took little risk, and earned solid rewards.
Defining Good And Bad Debt
Whether a given debt is good or bad depends on several factors. Thereâs the interest rate and the amount of time it will take you to pay back the loan. Then thereâs the matter of what youâre borrowing the money for. Equally important to consider is your unique tolerance for debt.
âI would equate bad debt with taking on too much risk without the ability to repay it,â says David Mook, senior vice president and chief private banking officer at U.S. Bank Private Wealth Management. âBad debt is either too risky or too costly.â
Car loans are another example of bad debt because theyâre used to borrow money to buy an asset that depreciates. In general, Mook says, âBorrowing to support ongoing living expenses is not a good use of debt.â
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Build Wealth With Peer To Peer Lending
Peer to peer lending is another popular way for investors to turn money into more money by lending money to people who need it.
Peer to peer lending involves loaning people money in exchange for interest payments.
The amount of money you can make will depend on the interest rate of the loan but its possible to earn over 15% in some cases.
The amount of money you can make will depend on the credit rating of the borrower.
For example, a borrower with a low credit rating might offer a higher interest rate but it also comes with a larger amount of risk.
A borrower with a high credit score might offer a lower interest rate but also comes with less risk.
To get started, you can use platforms like Prosper, Peerform, or Upstart.
Have $100 to invest? Check out these easy ways to turn $100 into $1,000!
Cons Of Paying Off Your Mortgage
- You could cut into savings. While using your savings to pay down a huge chunk of your loan may seem like a good idea, it can be risky to pour all of your money into an investment that is not the easiest to tap into in a pinch. No matter how tempting it may be, its important to keep some amount of cash aside in case of financial emergencies.
- It might be your only investment. If youre pouring everything you have into your mortgage, you may be neglecting other important investments, such as your retirement fund. You could also be making significantly more back on investments in somewhat riskier places, such as the stock market.
- No more tax deductions. If you pay off your mortgage early, you lose the ability to write off tax deductions on mortgage interest payments. These write-offs are actually quite useful and can increase your refund as well as lower your taxable income if youre still paying on a mortgage.
- You might pay prepayment penalties. There are actually some penalties in place, depending on your lender, for paying off a mortgage too quickly. If you pay off a mortgage within the first few years of the loan, your lender may charge you a penalty based on the outstanding principal balance.
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Borrowing At A Low Rate Can Increase Your Money Over The Long Term
U.S. citizens have $15 trillion in household debt. Within this astronomical number, there are both good and bad loans. When people borrow and spend the money on something that won’t appreciate in value , they’ve taken on bad debt. But when it’s used to invest in something that appreciates more than its borrowing costs, debt can be a good thing.
Businesses use debt all the time. Apple has over $100 billion in debt, which it reinvests in new products and generate profits. With good credit, you can utilize good debt for yourself, too, the same way a business does. You simply need a secured loan with predictable and manageable cash flows. By borrowing at a low rate and getting a higher rate on your investments , you can earn an additional 5% on your money. Borrowing to invest can enable you to earn more money, without needing a higher paycheck.
We are living in a unique environment with increasing inflation, even as borrowing rates remain near historic lows. People can get mortgages for under 3%, and lock in those rates for over 10 years! By using stable assets as collateral, such as your home or stock portfolio, you can often get a loan at an attractive rate and invest the proceeds for a healthy return. Before taking a loan as part of your investing strategy, just remember a few key ground rules.
The Bottom Line: Decide Whats Best For You
Both investing in your future wealth and paying off a mortgage early can be extremely beneficial in terms of savings and return on investment. Everyones financial situation is different, however, so be sure to take into consideration which option would work best for you before making a move. Its always a good idea to consult a financial advisor to help you make a plan.
Remember, its also possible to both pay down your mortgage and invest at the same time particularly if youre able to refinance to a shorter-term loan. If thats something youre interested in, visit Rocket Mortgage® today to get started or peruse our mortgage calculators to take stock of your finances and payment options.
Get approved to refinance.
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Settle For Less Than You Owe
You can also call creditors and negotiate a settlement of your debts, usually for a lot less than you owe. While its possible to take care of this yourself, an array of third-party companies also offer debt settlement services for a fee.
While paying less than you owe and escaping old debts may seem smart, the Federal Trade Commission does mention some risks. For starters, some debt settlement companies ask you to stop making payments on your debts while youre negotiating better terms, which can negatively impact your credit score.
Why this works: Youll only pay a portion of what you owe and can move on knowing you no longer owe those creditors.
How to start: Contact your creditors to offer settlements and if they agree, get the terms in writing. Or you can hire a reputable debt settlement company to do the legwork for you.
What About Other Types Of Debt
We know that revolving credit card debt is considered high-interest debt, but what about installment debt like auto loans, student loans and mortgages?
Since these are generally lower-interest debts, you don’t necessarily need to rush to pay them off especially at the expense of selling your investments to do so. Plus, the interest you pay on a mortgage and student loans is tax deductible.
Kalsman adds that it may not make mathematical sense to put excess cash towards these debts if you have refinanced or taken out a new loan in recent years at favorable rates.
“Generally, you should prioritize the debt from highest interest rate to lowest,” Dunston says. “If it’s below 4%, there’s an argument to keep your money invested but it can also depend on how it’s invested: high-growth portfolios or low-yielding accounts where you could lose money to what’s being accumulated in debt.”
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Now Go Make It Happen
You have the opportunity, right now, to change your outlook on debt forever.
Now that you know how to get out of bad debt, the next step is to take action. Your financial situation isnât going to change without massive action on your part.
So letâs do it!
How do you plan to use The 6-Step WealthFit Debt Strategy?
Whatâs the biggest âahaâ you got from this article?
Tell us on social media, and share this article with someone you care about!
Once you have your debt strategy in place, donât stop there! There are more ways to improve your personal finances so that you can live a life of financial freedom.
How To Transform Debt Into Wealth
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Creating wealth is not as difficult as people think. If you are currently in the habit of creating debt, then you have the ability to just as easily create wealth. You just have to refocus your priorities and get disciplined. Follow some proven steps in your endeavor to transform debt into wealth, and you may just find that saving and investing your money is more fun than spending it.
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Pay Off Mortgage Or Invest: How To Make The Right Choice
Whether you just got a raise and are considering how to best use those extra dollars or youre just planning for the future, choosing where to invest your hard-earned cash is a challenge. It makes sense that many homeowners would want to prioritize paying down their mortgage debt, but does it make more sense to invest extra cash in your retirement savings first?
Reducing Your Living Expenses
The greater the difference between your expenses versus your income, the more money you have to use as an investment. Cash flow management can help you track expenses, loan due dates, and payments more efficiently. And perhaps, the best advice for financing is to pay your debt on time and, if possible, always pay in full.
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Take Out A Loan Or Line Of Credit
You may be able to get a loan or line of credit from your financial institution. The interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition will depend on:
- how much you borrow
- what kind of loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition you get, and whether you put up collateralCollateral Property or assets that you pledge as a borrower as a guarantee that you will repay the loan. You may lose your collateral if you dont pay back your loan.+ read full definition or not
- the termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition of the loan
