Debt has always been a word that weighs heavy on people’s hearts and can often bring up a sense of dread and fear. There are numerous resources through shows, books, and online forums that focus on getting out of debt. What might surprise you, however, is that debt can also be good for you, if you use it correctly.
The key component in having debt work in your favor is to use it as leverage. “What does that mean?” you might ask. Leverage is the idea of using the debt you owe (borrowed money) to increase the income you get in other places (i.e. investments). You have a higher chance of getting more money, but at the cost of greater risk. We’ll present to you a few ways that debt can work in your favor.
Margin Investing – The main idea is to spend money that you don’t have on stocks. It seems shocking at first, but let’s help pain the picture: Imagine that you had $50,000 in your traditional brokerage account; you can choose to open a margin account with it. A margin account let you have a max of 50% of the purchase price of a stock. With $50,000 of your own money, plus an additional $50,000 loaned to you, you now can buy $100,000 worth of stock. If the stock price appreciates, you pay back the loan and keep the profit.
Leveraged ETFs – Exchange-traded funds (ETFs) focus on having you invest in specific indexes, bonds, commodities, or sectors. Leveraged ETFs are attractive because of the extraordinary profit potential. This is done by having an active participation in the market, choosing to hop in and out as the market goes up and down.
Short Selling – This method involves borrowing securities and selling them at a higher price, with the goal of buying these back later (hopefully a lower price). If you borrowed 10 bags of chips and sold them for $3 each, you would have made $30. However, you need to return the bags you borrowed, so you later buy them back at $1 each. This means you’ve returned the items borrowed, but you now have a profit of $20.
Forex Trading – Although less common than the previous methods, foreign exchange trading allows investors to use a small amount of money to control a larger amount of currency. People who are involved in forex trading look to find exchange rates that allow an increase after making the necessary conversions between different currencies.
While it seems counter to conventional wisdom, debt using leverage can allow individuals to make purchases they otherwise would never have dreamed of. It requires proper usage and careful consideration, but debt no longer needs to be the scary monster at the back of your mind; it can now be yet another tool as you make your money work for you.
Still have questions? The best thing to do is talk to a financial professional who can sit with you, calculate the numbers for what you’ll need versus want, and figure out what’s best.
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