Quick: what’s the simplest move to make today (financially speaking)?
In the event that you answered’borrowing money ‘, then go to leading of the class because you’re obviously a sharp student and a resident of the world.
Unlike days past when borrowing money was tough, today, everyone wants to lend you money. Banks, finance companies, bank cards, cooperatives, pawn shops – they all wish to lend you money. So that they send in pamphlets, flyers, letters, e-mails and even pre-approved loans with attached cheques to you. All you want to complete is say’yes ‘, sign the form and the money is going to be in your banking account in the blink of an eye.
So much so that I do believe the sole qualification that certain needs to borrow money today is to possess a heartbeat! Even people who have bad credit report or come in the’black-list’can still borrow money 借錢. Just log on to the websites of some cooperatives, and you might find they proudly display that’people in the blacklist can apply.’ Simply speaking, if you’re alive, then you can borrow!
So again, you will find no shortages as it pertains to people offering you money.
But should you use up the offer because it’s right before you? Should you grab it because it is there? In the end, it is fast, easy and convenient. And primarily, it is m-o-n-e-y.
Now while there are a lot of fun things you can do with the money, being someone who wants to create a better financial life (why else could you be reading this magazine?), the clear answer may be no. Firstly, you’re not likely to borrow the money just so that you can blow it on some gadgets, trinkets or toys. (Those who plan to take action should be reading Stuff magazine instead!)
You are going to borrow only when you are able generate more income with it. Put simply, you borrow only when the return from the investment you are going to make is higher compared to interest charged for the loan. Like, the return is 10 percent and the interest is 6 percent.
Obviously, you would not achieve this when the situation is one other way around, i.e. when the return from the investment is less than the interest charged for the loan. In the event that you claim that you cannot find an investment that gives an increased return compared to interest charged, then the clear answer is never to borrow! Wait until you can find one that gives an increased return. I will assure you that there are plenty of good investments if you look hard enough.
But obviously, life is not that straight-forward. As the math says that you ought to borrow when the return on investment is 7.5 percent and the interest is 6.25 percent, what’s missing from the equation is the risk involved. Now if both the return and interest are fixed, then it is easy, proceed and borrow. However, sometimes, both are not fixed, this means they could go up or down. And this being life, it is the return that always drops and the interest that always rises!
This is the reason you must only borrow when the return exceeds the interest by at least 5 percent. Like, if the interest is 6 percent, the return must certanly be 11 percent or higher. In this manner, you’re building in a security margin to cater the fluctuations of the rates.
You’ll without doubt realize that it is not possible for the aforementioned situation to happen. It is rare for the return from an investment to exceed the loan interest by 5 percent. In fact, it is rare for some investments to give a steady double figure return.
This is the reason you must borrow money only on two occasions; (1) to purchase properties, and (2) to expand your business. Needless to say, provided you have done your homework and know everything you are doing. Buying the very first property you see is a sure recipe for disaster.
This brings us to the most important point of all of them; once you borrow money, don’t forget that you have to cover it back, plus interest! And i’d like to further remind you that the people who lent you money do not have a sense of humour – they always want their money back! And many of them will require some extreme steps to obtain their money back.
So to summarize, do your research before borrowing money. If you cannot make more money with the borrowed money (while having a reasonable risk), then do not borrow. Let the people who didn’t read this informative article take all the risks instead!