August 16, 2007, 7:00 am

Financial Cliché VI: Leveraging Is (NOT!) Only for Rich Individuals

by: The Financial Blogger    Category: Financial Cliché
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I don’t know about this post… Honestly, just by writing the title I feel that I will get crucified. However, I do think that leveraging is for everybody. As previously mentioned on “You might not be aware of this: you are leveraging”, leverage tools are part of our daily life. We leverage over our cars and buses to go to work, while we could walk. Between you and me, it is safer to walk than to drive as you have slick chance of getting implicated in an accident on your too foot then when your feet is to heavy and you are driving/racing to work. However, it will take you forever to work and surely cost more money into new shoes!

 

Nonetheless, it is a fact leveraging strategies were first designed for wealthy people. Why is that? It is pretty simple. As it is the case with any other new techniques, the first tries implicate way more risk as many factors might not have been considered up front. This is the reason why planners were looking for people that could afford loosing money to try leveraging. They are more likely to take this kind of risk.

 

Not only that but the more you have money, it is easy to make money. You can diversify your assets over many investment vehicles such as rental properties, private companies and investments. Rich people are leveraging on most of their assets. But is does not mean you can not do the same thing. Pay yourself first is a good way of thinking. But pay yourself first with other’s people money is even better!

 

If you are a home owner, you are probably leveraging over your main residence. Your mortgage is a great example of leverage for your own benefit. This benefit turns into money when we are talking about leveraging strategies. There are two rules of thumb to respect in order to not over leverage. In “How Much Should I Leverage?” I explain that as long as you are comfortable with the loan payment and that you never borrow more money than half of your net worth; you should be in a good position.

 

You definitely not need to be rich to leverage with a 25K investment loans. At 7% interest rate, that makes monthly payments of $145. Technically, you need a net worth of 50K and about less than half of your car payments as cash flow. By eliminating your debts through a defined plan, you should be able to liberate enough cash flow to afford a payment on a 25K investment loan.

 

As previously mentioned on this blog, risk is a perception of a “possibility”. Thinking leveraging is too risky for the middle class is wrong. Not knowing what you are doing is risky. Therefore, get yourself a good planner, make your own researches, ask questions to financial bloggers (or to The Financial Blogger 😉 ), bankers and financial advisors. You will find out about a new world of financial opportunities.

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Comments

Great article. I’ve been tempted in the past to just take out an investment loan and make a go of it. I’m afraid of the risk, just procrastinated too much!

I’ve saved up a little over 5k and started investing it just to see what would happen. Took some big gambles and so far I’m up about 7% in a year. Given the market conditions lately that % has taken a big hit.

I just need to be Nike, and just do it!

My time is much better spent studying stocks in the evening than watching tv!

by: The Financial Blogger | August 17th, 2007 (7:53 am)

You got that right Dawger!
Since I started this blog, my level of financial knowledge has gone up while my time wasted in front of the TV went down. I think it is a good trade off!

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