How to borrow money like rich people do? Read this as you will be able to understand the power of leverage that allows achieving more in a shorter period. I will give you three principal arguments. You can also reflect on three key lessons learned on how to borrow money.
How to borrow money and achieve more in a shorter period?
There are really three components to it: borrowing allows to buy assets faster, it also enhances returns on your cash, and finally it helps in beating inflation. Let me elaborate on each these arguments.
Faster acquisition of assets
The principal reason why rich people are borrowing money is that it allows them to grow faster. Wealthy people are focused on building assets. Financial institutions are always happy to finance assets, especially when a given individual has proven that he or she knows how to make money on those assets.
My area of specialty is real estate. I have used leverage massively over the last ten years. It allowed me to grow significantly over time. I need to underline one thing here. Fast growth is great but before you decide to expand fast start slow and small. This is how you will learn what assets are all about. You will make mistakes. Everyone does. It is better to make a little mistake and learn a lesson than make a big mistake and be unable to recover from it for many years.
Greater returns on cash
The second reason why the rich are borrowing money is a return on investment. To be specific, cash on cash return on investment. You can google this term or look it up on Wikipedia. I will just highlight what this is all about. When you find an opportunity that has a good return on investment you can use leverage to get the most of cash that you are willing to put as a downpayment. Your overall return will grow significantly as a result.
A way to beat inflation
Last but not least, wealthy people are borrowing money because they know it helps them beat inflation. Savers are losers in today’s economy. A dollar today is going to be worth much less than a dollar ten years from now. Wealthy people are borrowing money because they know that they can control the assets that they buy. They can make more money out of those assets over time. In consequence, they will pay down their debt with dollars that are worth much less in the future. On the other hand, their assets will still appreciate in value in most cases.
How to borrow money: key lesson learned.
Everything you have read above sounds exciting, doesn’t it? You need to make sure that you reflect on the following lessons learned. Borrowing money can work great for your benefit. It can also be a source of serious trouble if you do it carelessly.
Key lesson #1 – not all borrowing money is the same
You need to understand that there is a key differentiating factor when it comes to borrowing money. This factor is all about what you are financing. Efficient borrowing (also known as leverage) is using borrowed money to buy assets that appreciate in value over time, e.g., real estate, businesses, etc. On the contrary, inefficient borrowing (also know as bad debt) is using the money to buy items that depreciate over time or have no material value at all, e.g., cars, holidays, electronics, etc.
Key lesson #2 – avoid speculation
Let me explain what I mean by speculation in this context. When you are borrowing money to buy something that you hope will grow in value over time, this is speculation. On the contrary, when you use leverage to get additional cash flow from your new asset, this is not speculation. Many people have failed to borrow money to buy stocks or trade. Many have also failed to borrow money to purchase real estate only expecting capital gains. You need to be careful and avoid speculation.
Key lesson #3 – control your debt to income ratio
You need to understand that every business involves taking risks. You can manage some of them. There are also risks that are beyond your control or influence. I have set myself a barrier when it comes to borrowing money. I do not want my leverage payments to be more than 25% of my net income. This is how I control myself from growing too fast and getting into trouble if any of my investments stop giving me cashflow.
Final thoughts: borrowing money requires knowledge, experience, and skills
Based on my experience, efficient borrowing money is one of the most advanced skills in personal finance that you can acquire. You need to understand how money works. It is a broad subject itself. You can start today. Check how prepared you are to use money as the rich do. Take this free online financial IQ assessment. Understand your strengths and work on the areas that require improvement. Financial Independence Starts Here
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