The life changing magic of using someone else’s money to grow your own wealth
Have you ever heard the saying ‘success leaves clues’? In the world of wealth creation, nothing could be truer. In this article we wanted to share with you a highly underutilised, enormously effective way to grow your wealth. And the best part? It involves using other people’s money to do so.
Not only is this a time-tested strategy used by the world’s most successful investors, it’s also a strategy that can be utilised in today’s market.
Often referred to as leverage, this investment strategy involves taking on debt for the purpose of investing and obtaining a higher return. The primary advantage of borrowing money to make money is simple: you can access higher investment returns sooner than if you only invested your own money.
So, let’s take a quick look at the ins-and-outs of how leveraging works – to save you the time researching, we have put together a snapshot for you below.
Leverage and COVID-19
There’s no getting past the impact COVID-19 has had on all of us. However, if you are thinking of leveraging to grow your wealth, there is a silver lining for you.
Interest rates are at an all-time low so now may be an ideal time for you to get started and start your journey towards financial freedom.
Executed successfully, leveraging involves putting money into investments that will grow in value more than the interest rate you will be paying on borrowed money. Great examples here are property or shares. The moneysmart.gov.au website has some great information to help you understand more about growth investments compared to other types of investments.
So, if leveraging is such a good strategy, why doesn’t everyone do it? The idea of borrowing money can be scary which is why not everybody does it.
While it is wise to be afraid of the unknown, it may also be what’s holding you back from reaching your financial goals.
In investing, what is comfortable is rarely profitable. – Robert Arnott
Sometimes, investments involve reaching slightly out of your comfort zone to be a success. The rewards are there for people who know the risks, the strategies and balance them wisely.
So what are the risks of using leverage as part of your investment strategy?
As with any opportunity, the greater the potential reward, the greater the risk. Although the benefits of leverage are attractive, it is vital that you consider the following risks before implementing a strategy where leveraging is at play:
- A rise in interest rates is always a potential. You should ensure you have sufficient cash flow to ensure you can absorb these interest rate increases.
- An unforeseen event such as the loss of your job, an illness or injury that may affect your cash flow. This may make it difficult for you to pay back your loan. A key reason it’s incredibly important to have income protection in place!
- Your investment may fall in value. This may result in the balance of your borrowed funds exceeding the residual value of your investment.
As you can see, knowledge is the key to success, and this is certainly the case when it comes to using other people’s money to grow your wealth. Understanding the risks is equally important as understanding what success looks like.
Here is how we recently assisted clients Tom and Jane* to successfully execute this exact strategy.
Having accumulated significant value in a property they owned Tom and Jane were keen to purchase their first investment property. Leveraging the value in their existing property, Tom and Jane were able to secure a $250,000 line of credit, at an interest rate of 3% pa.
Tom and Jane utilised the borrowed funds to secure a 25% share in commercial property which is now returning income in the order of 7.5% pa. Thus, Tom and Jane have been able to leverage to generate passive investment returns.
As a bonus they will also benefit from the capital growth in the property’s future sale date.
Like the idea of borrowing money to make money, but not sure where to start?
At CCFPG, our experienced team of investment experts are here for you. We will guide you on how to invest your money and show you how to borrow money the right way. We have the knowledge to understand your financial situation, identify risks and help you on the path to financial freedom.
We’re with you every step of the way to ensure you have peace of mind when it comes to how and where your money (and other people’s money!) is invested.
If you are looking to fast-track your finances and head down the path towards financial freedom book a complimentary initial meeting with one of our experienced Financial Advice Specialists. We have offices located in the Central Coast – Erina, (CCFPG), Newcastle – The Junction (NFPG), and Sydney CBD (SWA).
*Names changed for privacy reasons
DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.