Borrow to Spend? Or Borrow to Invest? That is The Question
Looking to get a head start on your investment goals? Or maybe you need to make up for lost time. There are 3 factors to consider as you work with your Financial Advisor to create an investment strategy to make your goals a reality.
There’s a better way to build your savings
With the help of your Financial Advisor, you’ve made solid investment choices and you’re on your way to achieving your financial goals. Maybe you are saving monthly because you know the more you save over the long term the better. What if there was a way to put more money into building your retirement savings right now?
Use your borrowing power to invest in your future
Every day, we use borrowed money to spend on lifestyle items that we want now, such as furniture, clothes, electronics and automobiles.
Imagine using your borrowing power to invest for the future and build wealth instead? You may already be doing it with an RSP loan or a mortgage, because investments like an RSP or a home have the potential to increase in value over time.
This is a good type of debt, because rather than borrowing to spend on lifestyle items that depreciate quickly, when you borrow to invest, you’re investing in your future.
Let’s assume you have excess cash flow of $920 a month, and you need a car. You could use the entire $920 a month to finance a $50,000 car. Although, within 5 years, your car will have depreciated to a value of $30,000.
Consider this option instead – use your monthly cash flow to purchase a car and build your wealth.
Instead of paying $920 to finance a $50,000 car, you could buy a $30,000 car, where your monthly payment would be $553 instead. This would free up $367 a month, which could be used for a principal and interest payment on a $20,0003 investment loan.
After 5 years, you would have paid off the loan, and the combined value of your car and investments could be $42,3334.
More about investment loans
An investment loan allows you to borrow money to purchase investments that have the potential to increase in value, and:
Accelerates savings through an initial lump sum investment
Interest costs may be tax deductible
Can be used as a wealth building tool
What are compound returns?
Compound returns on an investment means that returns are calculated not only on the initial investment, but also on the accumulated growth from year to year. Having a larger initial investment growing for the longest possible time is essential for compounding success.
Is an investment loan right for me?
Your Financial Advisor can help you determine if investment lending is right for you. In general, investors who may benefit from this strategy will have:
A long investment horizon
Available cash flow
A high risk tolerance
What is interest deductibility?
Generally speaking, interest paid to borrow money to earn investment income is tax deductible. When the interest is deducted, it can be an effective way of reducing the overall cost of an investment lending strategy.
While investment loans have the ability to magnify gains, they also have the potential to magnify market losses. Leveraging involves greater risk than purchasing investments using only your own cash resources because it has the potential to magnify investment losses.
You are required to repay the loan, including interest, regardless of the investment return. An investment loan may limit your access to credit due to the outstanding debt of the loan.
Work with your Financial Advisor to understand both the benefits and risks of this strategy.