| How to Borrow Money, Part 2 |
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Investment real estate. Real estate is so costly that it's the rare person indeed who can afford to pay cash for it. Borrowing to invest in real estate can work very well, so long as you avoid overpaying for the property. But even if you acquire a property at a good price, investing in real estate is still a risky proposition. High-risk borrowing. There are two areas where borrowing may reap substantial rewards, but these are riskier still, compared with borrowing for a house, an education, and home improvements. This duo is (1) borrowing to invest in stocks and bonds and (2) borrowing to start or sustain a business. While you (or your investment adviser) may think you have the Midas touch in selecting winning investments, investing in stocks, bonds, and mutual funds with borrowed money (called investing on "margin") can result in very large investment losses if the investment markets go against you. Borrowing to start a business or to sustain a business that may be suffering is even riskier. Conventional wisdom suggests that paying off high-interest credit cards should be your number one priority before putting any money away for the future in savings accounts, retirement savings plans at work, or anywhere else. The reasoning for this guideline is financially sound. Why put money into an account that will probably earn less than 10 percent when you're paying interest on a credit card that's approaching 20 percent? Financially sound advice, for sure, but I often encourage a somewhat different and controversial approach to the pay-off-the-credit-card versus save dilemma: do some of both. Here's my reasoning: First, there is no joy forthcoming from making payments against outstanding credit card loans, department store cards, gas company cards, etc. It's usually a monthly reminder of past spending sprees. Depending on the extent of the indebtedness, you might be looking forward to years of paying down the loans without making much if any progress toward a brighter financial future. On the other hand, putting some money, even a little bit of money, away for the future is always good for the soul, particularly for those souls who have little or nothing in the way of savings. |
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