Quick: what’s the simplest thing to do today (financially speaking)?
In the event that you answered’borrowing money ‘, then visit the 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 desires to lend you money. Banks, finance companies, bank cards, cooperatives, pawn shops – each of them desire to lend you money 借貸. So they send in pamphlets, flyers, letters, e-mails and even pre-approved loans with attached cheques to you. All you want to do is say’yes ‘, sign the proper execution and the money is going to be in your banking account in the blink of an eye.
So much in order that I believe the sole qualification any particular one must borrow money today is to have a pulse! Even people with bad credit report or have been in the’black-list’can still borrow money. Just log on to the internet sites of some cooperatives, and you will see 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 in case you take up the offer because it’s right in front of you? In case you grab it because it is there? All things considered, 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 certainly can do with the money, being someone who would like to create a better financial life (why else could you be scanning this magazine?), the answer may be no. Firstly, you’re not planning 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’re able to generate more money with it. Quite simply, you borrow only when the return from the investment you are going to make is higher compared to the interest charged for the loan. For instance, the return is 10 percent and the interest is 6 percent.
Obviously, you’d not do this when the specific situation is another way around, i.e. when the return from the investment is lower than the interest charged for the loan. In the event that you say that you can’t find an investment that provides a higher return compared to the interest charged, then the answer is never to borrow! Wait until you will find one that provides a higher return. I will assure you that there are many of good investments if you look hard enough.
But needless to say, life is not that straight-forward. While the math says that you need to borrow when the return on investment is 7.5 percent and the interest is 6.25 percent, what is missing from the equation is the risk involved. Now if both return and interest are fixed, then it is not an issue, proceed and borrow. However, often times, both are not fixed, meaning 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 need to only borrow when the return exceeds the interest by at least 5 percent. For instance, if the interest is 6 percent, the return should 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 too simple for the aforementioned situation to happen. It’s rare for the return from an investment to exceed the loan interest by 5 percent. In reality, it is rare for most investments to give a regular double figure return.
This is the reason you need to borrow money only on two occasions; (1) to buy properties, and (2) to expand your business. Of course, 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 main point of them all; whenever you borrow money, don’t forget that you have to pay for it back, plus interest! And allow me to further remind you that the folks who lent you money do not have a sense of humour – they always want their money back! And some of them will need some extreme steps to get their money back.
So to summarize, research your options before borrowing money. If you cannot make more money with the borrowed money (while going for a reasonable risk), then do not borrow. Let the folks who did not read this article take all of the risks instead!