Studies of Life

Learning by doing.

On borrowing money to invest

12 August 2014 by Jim

Money Honey

If you are pretty certain that you can get a good return on your money by investing, be it via Peer-to-Peer (P2P) lending sites like Bondora or via investing in the stock market, bonds or something else, it’s just a matter of time before your net worth increases dramatically, maybe to 100’000 first, then 200’000, 500’000, or even one million.

But what if you don’t have money to invest at all? Or so little that commissions would eat it all up? Why not borrow some initial capital, which can currently be done for below 5% annual interest in Europe, and invest it for 20%+?

Borrowing money from a bank is, in my opinion, not a good idea, even if it would speed up your net worth growth dramatically. First of all, you are never certain that an investment will turn out well. You could always lose money. And what do you do if you borrow 50’000€ and then lose all of that in a few months in the stock market? It’s not easy to be in debt, so if you can possibly help it, never get into debt in the first place.

What’s that? Life without debt is impossible? It is most certainly not, especially if you know how investing works. You can build up your wealth, you don’t need to borrow it somewhere else at the risk of being in debt for the rest of your life.

If you want to invest money, using your hard-earned income to do so will most certainly make you more careful about how you invest than if you simply borrowed a large sum. And you should be careful, because your money is at stake. So make cautious decisions, in the beginning, and do not bet everything you have on one investment.

If you’re an entrepreneur and self-employed like yours truly, you may be able to ‘borrow’ your own money by having your company pay your salary a few months or even a year in advance, so you can use that money to invest instead of having it sit idly in the company bank account. You can even lend yourself money from your company account if you have lots of cash in there and pay it back little by little. As long as you don’t pay yourself interest on the borrowed amounts or try to write said interest off on your taxes (which only banks are allowed to do), that is fine. But of course you still have to think about whether borrowing is an intelligent decision, even in this case. Does your company need the cash in the near future? If yes, don’t take it out of the account, obviously.

Even if you don’t have a company account to source cash from, that’s not a big deal. The smartest way to go about building a cash base to invest without any risk whatsoever is to save, i.e. to spend less money than you earn. As a matter of fact, zero-based budgeting is the smartest thing to do for your personal budgeting, so smart in fact that Luxembourg’s government has finally adopted it to create the 2015 government budget. D’uh! What is zero-based budgeting? Instead of trying to find ways to cut costs, you periodically look at every expense you have and think hard about whether it is really necessary. Lots of subscriptions can be cancelled this way, and if you’re still free (i.e. without wife or children) you may even be able to make decisions with a huge financial impact like moving in with a roommate or your family for a few years to cut back on rent. Every decision to reduce your spending may be more or less painful, but it’s all worth it in the end. If you get a 10% return on your money every year, you will earn 10 cents on every euro not spent within 12 months. And, as you may have read on this blog, consistent investment returns of 20% per year and more are nowhere near impossible.

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