Most people who look forward to a glorious future go for strengthening their financial position. In order to do so, they generally take the path of saving their money.
At a first glance, this approach seems the perfect solution to become rich and wealthy; however, if you analyze this approach further, you would soon see the flaw in it.
Well, although you save money but due to inflation and other economic situations, your money goes on becoming less valuable.
So in the real sense, your money isn’t growing to the level that you are expecting.
Thus if you really want to accumulate wealth, you have to make your money work harder for you. So you have to find the way that makes your money work harder for you.
Well, if you ask me, then my suggestion to you would be to leverage your money.
Leveraging is one financial technique which makes your money work harder for you.
Actually, Leveraging helps to multiply your gains. More specifically, Leveraging comes into the picture when an investor earns a return on a capital base that exceeds the investment amount made by the investor himself. In simple terms, leverage is nothing but doing more with less. In leveraging money, you not only use your resources (money, time, effort, skills) but also make use of resources that you borrow. It can be borrowed the money, it could be using other’s knowledge and skills, and it could be in the form of other’s credibility, it could also be in the form of other people’s contacts and networks.
Most popular form of leverage is to borrow money from other people. Well, you can also buy fixed assets, or can also use derivatives to gain leverage. Leveraging is the key for making wealth. There are various forms of leverage such as Money Leverage, Time Leverage, People Leverage, Alliance Leverage, etc. Well, if you talk of rich people, they all have one thing in common that is they use one or the other form of leverage in their life.
Why do you need to leverage?
As I have already pointed out, you need to leverage only if you want to become rich. So, if you desire to become rich and wealthy then you should apply and use leverage in your life. There are many people who have no leverage in their earning model and that’s the biggest reason why they are not rich. Leveraging gives you the power of earning more. And for that you don’t need to work more. Instead, your money will work for you. Your allies will work for you. Your partners will work for you and even your employees will work for you. So by leveraging you stand to gain wealth, richness and prosperity.
When should you not borrow money for leveraging?
In the midst of leveraging your money, you should also know when you should not borrow money for leveraging. In fact, you should not borrow money for financial instruments over which you have no control. Examples of such instruments may be stocks, index funds, mutual funds, bonds. In such type of instruments, the investor lacks control over the returns. So, if you have no control over an investment instrument, it is a risky affair to borrow money, and applying leverage can become suicidal.
Let me give you an example to make this clear to you. You can borrow money to invest in stocks hoping that stock prices would appreciate, and you would gain by selling them. However, this is only your expectation and not a necessary and the only outcome. You have no control over market conditions. The markets may even tumble down reducing the prices of your stocks. The stock prices may dip giving you an overall loss. So you should only leverage when you have gained financial capability to control an investment.
How to Leverage Your Money?
As already pointed out, leveraging is based on your comfort with any type of investment. If you have the proficiency and control over a financial instrument, you can definitely go for leveraging it.
Here, I have listed down some important assets and their potential for leveraging.
Although leveraging stocks can be dangerous, still many people find it easy to leverage stocks as compared to other investment options. By having a margin account, you can leverage any stock investment. Having a margin account lets you borrow money from your broker at low interest financing. For every single dollar in your account, you can purchase $2 worth of stocks. So you can leverage your portfolio at a ratio of 2:1.
Real Estate is a safer form of leverage as compared to stocks. You can easily go for leveraging real estate with fixed rate financing and 20% down payment. Banks provide low interest loans to investors for buying real estate who have the capacity for putting down payment as close to 20% of the assets worth and have a stable income source. There’s tax benefit too for buying property on leverage. Actually the tax code subsidizes investors who buy real estate on leverage terms.
Fixed Income Investments
Fixed Income Investments like loans and bonds can also be leveraged. Bond Portfolio can be leveraged by having margin loans from a broker. You can also leverage loans by borrowing from a P2P site at a low interest rate. Loans can also be leveraged by investing funds. In leveraging fixed income portfolio or loans you are exposed to various factors that are beyond your control such as rising interest rates.
So you see that leveraging is a way out for making wealth. Leveraging actually gives you the required money in your hand. It’s not necessary for you to save that much money, just leverage and gain the power to invest and grow your money. In a nutshell, by leveraging you get to make money by using money contributed by others or by using money loaned to you.