Why You Should Never Borrow to Invest

February 26, 2018
1674 Views

One thing that new investors often ask, is whether it’s a good idea to borrow money to fund an investment.

Investing is one essential way that you can build your wealth and build security for the future. Whether investing in equities or even in a larger hedge fund, there are opportunities for significant returns that could help you to achieve financial freedom.

However, it’s absolutely critical to remember that investment is an inherently risky practice. Returns are not guaranteed and the fact remains that people do lose money in the stock market, and even in other markets like precious metals and property.

Only Invest What You Can Afford to Lose

The golden rule of any investment is to never go in with more than what you can afford to lose.

Investments should be made with residual income, but should never come from the budget allocated for standard expenses. Loans should not be used to fund a new investment neither any other borrow.

There are plenty of examples of people who have taken cash loans, used advances from credit cards, or taken mortgages on their primary homes or any other borrow to fund new investments. This is one of the riskiest possible investment practices and can easily lead to bankruptcy and catastrophic consequences for your financial situation.

You may have also been exposed to margin trading through a stock broker. This is when a broker will offer to purchase equities in amounts that can’t be funded by your current account balance. If the equities grow in value, then you’ll stand to make money. If the equities decline, then you will be left out of pocket and in debt to your broker.

Losing your own surplus capital is one thing. Losing money that originates from any form of borrowing means that you’ll be in the red with a worse financial situation than what you started with. No matter how an investment opportunity is presented to you, the risk of coming out worse-off is simply too much to shoulder.

To build capital for investment, consider saving long term (one year or more) to develop a safe investment fund that is completely separate from your other finances. Tax returns and other short term gains can also be used to fund investments.

Borrow, There Are Exceptions

Purchasing a first home is a long term investment where borrowing is not frowned upon. Throughout the term of a mortgage you can build equity in your home, and with property value fluctuations you may even be able to make money on your investment. The difference here is that you will be living in the home and offsetting payments that you might otherwise be paying for renting or a long term lease. Borrowing to buy a primary home should not be considered along the same lines as other investments.

Use your money wisely by researching the investment opportunities that are available to you. Avoid taking on debt for new investments because the risk of losing it all is simply too high, and you will have little or no security to fall back on.

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