Is it a good idea to invest using borrowed money?

I have heard of this question quite a lot from social media, and friends who wants to start investing, but they want to have handful amount of money for a good start. 

Answering the question, the answer is yes, and it is called borrowing other people’s money, in personal finance, but that depends on several factors such as risk tolerance, interest rate, investment vehicle and the lender.

Introduction to Other People’s Money

Other People’s Money is a term used for borrowing the money from channels such as the bank, credit card, and lending companies (that came from a pooled fund gathered from other investors) and the use of Other People’s Money for investment or entrepreneurial pursuits.

The definition sounds confusing especially if you are new to personal finance. I will further explain.

Ever wondered where credit card funds come from and why it feels so unlimited. Credit card companies and banks issue bonds to investors/lenders. For example: Bank Y issued a $50 bonds to Investor F. This bond was bought for the price of $30 today. Now the bank is obliged to pay lender the principal amount of $30 in the agreed time of repayment let’s say after 6 months. After 6 months investor F will get $20 profit depending on the outcome of the business.

Where do you think will Bank Y get the $50 to repay investor F after 6 months? The money will come from all credit card users paid interest and penalties. The same system works on personal loans.

Risk Tolerance

Using Other People’s Money is a like double-edged sword. The reward is greater because of the minimum to no investment needed to start, but the risk is doubled because borrowing money comes with penalties.

The risk involve is when you couldn’t pay your lender on the deadline of your agreed time of payment. There will be penalties such as recurring fees or even worse losing your declared collateral (your properties). It could even lead to a never-ending cycle of debt.

Investment vehicle and Lender interest rate

Aside from the risk involve, interest rate matters. Interest is one of the profit you make from investment. If your investment cannot exceed the interest rate of your lender’s interest rate, then you’re just burning money out of nothing.

In my own personal experience, It is not worth it to invest your borrowed money in conservative trust funds and mutual funds due to its low monthly interest rate of 1% to 5% that’s already from a high dividend fund. It cannot beat the interest rate of your lender. Personal loan has a monthly interest rate of 7% to 15%, while credit cards has a monthly interest rate of 5% to 10%. If by any chance you can borrow money with a much lower interest rate than 3%. You might be able to pull it off.

It sounds like there’s no risk in borrowing money from a friend or family but I have seen thousands of ruined relationship because of unpaid debts.

Do you think it’s worth it?

Where should I invest other people’s money?

Borrowing other people’s money should only be used by experienced investors and entrepreneurs. It is perfect for people who wants to have more leverage on their already successful business and still seeking room for expansion of their business empire or an expert real estate investor who needs to buy properties to buy and sell for a profit or have it rented.

If you’re an expert trader, you can use it on Forex and stock market.

If you are new to investing I want you to start as small as possible. You can start investing on stocks, UITF, and mutual funds for as low as Php 5000. Php 5000 is a good amount to learn about investing. Plus, you wouldn’t be afraid to lose a mere Php 5000 than losing more from your debt.

Now, do you still think you have what it takes use other people’s money?

Please comment down below.

Francis Noel Nocete

Blogger | Intrapreneur = Entrepreneur + Employee | Investor | Book Enthusiast |

Francis Noel Nocete

Blogger | Intrapreneur = Entrepreneur + Employee | Investor | Book Enthusiast |

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