For decades, most people’s money mindsets were focused on reducing debt as quickly as possible.
A newly married couple would buy a house and then diligently pay off the mortgage over the next 20 or 30 years.
Then, when they retired, they owned their own home, but they generally didn’t have much money apart from the pension to live on.
Times have sure changed, but that old-fashioned philosophy remains the same for too many people.
Fortunately, over the past two decades, more Australians than ever before have chosen to take charge of their financial futures, because a retirement spent merely surviving from one pension payment to the next was not for them.
Often, they have been able to create wealth and a brighter financial future because they didn’t listen to myths about borrowing money to invest.
Here are four of them.
One of the biggest myths is that all debt is bad when that is not true.
Sure, there is bad debt such as high-interest debt used for personal consumption – such as overspending on your credit card – which should always be avoided.
Good debt, on the other hand, is debt used to acquire assets that will appreciate in value over time and bring in income.
It’s the concept of using other people’s money (the banks) to create personal wealth like property investors do when they take out a mortgage
And then there's necessary debt - the debt against your home which while not producing income should be an appreciating asset.
Sure interest rates have moved up from historic lows, and yes they'll still rise a little further, but I believe that in today's higher inflationary and relatively low interest-rate environment good debt is really an asset.
If you can borrow money today at a 5% interest rate and use it to buy a property that will grow in value by significantly more over the long term and at the same time your tenant will pay you a rental return in the order of 3% you can see why having a good debt it is considered an asset
Leverage involves borrowing capital (money) to invest with the goal that the asset will appreciate in value as well as provide income to repay the loan.
For many people, using leverage to invest would probably keep them awake at night because they are generally risk-averse.
The thing is, investing does involve an element of risk.
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However, the secret is to understand those risks and ensure that you are only investing in the types of assets that are primed for growth because of their superior attributes such as location and dwelling type.
Another way to minimise your risk used to have a rainy day financial buffer in place to cover any unforeseen expenses.
While wealthier people might have more cash flow to cover any shortfalls, that is usually because they used leverage to invest in capital growth assets to start off with!
When borrowing to invest, regardless of your income level, it is vital that you understand your cash flow situation thoroughly.
Fundamentally, that means that you should never borrow more than you can afford – whether you earn $80,000 a year or $250,000 – as I already suggested, you should always have a cash buffer at your disposal.
The interest costs of borrowings used to earn income are generally tax-deductible.
For example, an investment property with a mortgage might have $1,800 worth of interest that is payable every month.
Of course, your tenants will pay you rent, which should cover much of this amount, depending on the property.
Ultimately, the property will become cash flow positive over the long term as the rent increases.
However, there is a number of scenarios that could see your interest costs cease to be fully deductible.
An example is if you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and it is used for both private purposes and for rental property purposes.
As you can see, there are a number of myths when it comes to borrowing money to invest.
At the end of the day, those investors who create wealth are the ones who don’t listen to naysayers or believe in money myths.
Rather, they take responsibility for their financial education and future and work with experts who can help them achieve their money goals.