You guys know I heart leverage. It doesn’t matter what business you’re in, it’s leverage that ends up making an entrepreneur rich. Real estate investors do it by using money as leverage, and then using the cash flow off each property to pay down those loans, repeating until either wealthy or they give up in frustration, depending on how much each property cash flows. This is why price appreciation shouldn’t be a primary reason to buy real estate.
It’s the same thing when you own a business. If you pay an employee $50k per year and they generate $75k in profit for the company, you’re sitting pretty. If you repeat that a million times you’ve got a Fortune 500 company. If you repeat that a billion times you are living in a bizzaro world where dreams become reality and cats are friends with dogs.
Don’t think you’ve got the ability to leverage? There are many different ways, most of which you haven’t even thought about. Of course, if you do leverage, there’s risk involved, and yaddy yaddy yadda. You probably shouldn’t do it unless you have a good understanding of what you’re about to buy. No getting stock tips on Twitter and then borrowing money to buy them. Do your research first, kids.
Yeah, I know I said unlikely sources, but this one still needs to be said. Borrowing against your house is easy, (assuming you have the equity to borrow against) and should get you a decent interest rate. It’s so common that they came up with a name for it, the Smith Maneuver. Alas, it is not named after me, unlike the Smith Tire Fire in my home town.
The typical strategy behind the Smith Maneuver is buying dividend stocks that, as a basket, yield more than the interest rate of the underlying loan, which these days will set you back 3% a year. Any price appreciation you get is the profit, but the dividends protect you from declining markets. Seems like a pretty decent deal to me, again, assuming you know what you’re doing. That’s two disclaimers now. I must be getting soft in my old age.
Nobody ever leverages their student loans, which is really too bad.
Here’s what you do. You go to school, and make sure you’re working enough to cover your expenses. This is important, since you don’t want to borrow to cover, uh, certain beverages that students are known to consume. That’s not leveraging, it’s borrowing to buy stuff, which we all know I don’t like. Anyway, you borrow all the student loans you can get your hands on, and then you invest that money.
Remember, this money is interest free until you graduate, and then in most provinces you can apply to extend that, depending on your financial situation or whether you’re still a student. Some provinces will let you extend it for years if you’re poor enough. Not possible you say? Vanessa is doing it right now, with plenty of encouragement from this guy.
Even if you take a few years after you graduate to pay off these loans, it’ll still average out to a cheap form of financing. They could be the perfect way to finance your first business or invest in the stock market. Just don’t use it to impress other university kids with your flashy things.
Although 0% car loans aren’t nearly as common as they once were, they’re still out there if you look hard enough or if you buy a model which the dealerships are looking to punt out the door.
Once you get down to crunch time, make sure that the price you’d get if you financed it is the exact same price you’d get with 0% financing. This is important, since any additional cost you’d pay for the car is just another form of interest, and is a common dealership trick. Your salesman might have to go get approval from the manager, which is always good for a lark.
Aside: Here’s my advice on buying a car. I would know, I own one.
Assuming the cost of each option is exactly the same, go ahead and finance that car at 0%. Free money is good. Use it to your advantage. At some point you’ll have to start saving up for a car again, but not for a while. After all, a brand new car should easily last you 10 years or more, unless you have an ungodly commute. Pay off the loan over the 3 or 4 years, and then start putting a few bucks a month away towards a new car.
Whoa. Whoa. Whoa… Whoa. Nelson, you be crazy.
Yeah, this one ain’t for the faint of heart. There’s really only one situation where I’d recommend leveraging using credit cards, and that’s if you already owe a bunch of money on credit cards.
Assuming a $5,000 balance at 18% interest, you’re looking at $900 per year in interest. That’s a lot to pay for whatever it was you bought. But, if you can use a balance transfer to reduce that rate to 0%, or 1.9%, or whatever, you’ll easily save yourself hundreds of dollars.
Now this doesn’t mean you can just pay the minimums and go on with your life. You can’t even use this money to invest in stocks or real estate or anything else. You have to plow all your excess cash into paying off that credit card balance, since you’ll be back to paying 18% before you can even blink. An 18% guaranteed return is great. You might make more in the stock market, but probably not. It’s just another way of using cheap debt to make yourself more money.
If you don’t have any financial sophistication, paying off debt is pretty much a no brainer. It’ll beat GIC returns every time, and you shouldn’t be picking individual stocks if you don’t know what you’re doing. If you think you can pick individual investments, take a risk and leverage some cheap money. Leverage will help you get rich. Buy a bread route. Buy a blog or 8, even though I’m not a huge fan of that business. Take a few risks with your money.