Leveraging Your Money to Get Rich Part I
Can you get rich by borrowing money? Can you avoid risk by getting rich by borrowing money? Is it possible to buy a house without borrowing money?
The answers are Yes, No, Yes. But we have a more fundamental issue at hand aside from all that we hold dear to our hearts in this capitalistic world. The issue is that we’re greedy and we’re impatient. Realize that investing is a long term process. It requires patience and persistence. We’re not talking about wasting away our retirement in two seconds at the craps table. We’re talking about creating long term wealth for you and your family and their children and their children.
Can you get rich by borrowing money?
You bet you can. You can get stinking filthy rich. How? By using a little bit of money to push around a large amount of money.
Let’s say you had $20,000.00 to your name. That’s it, $20,000.00, no more, no less, and you wanted to purchase a home priced at $200,000.00. Do you have $200,000.00? No way, but you were patient and persistent enough about your spending to save 10% of that. Should you be rewarded for this type of behavior? Probably not. It’s just savings. Good for you. So how do you acquire an asset worth 10 times as much as you have in the bank? And, why would you want to do that?
Well, that’s easy. Firstly, you find someone who is willing to cough up the difference of $180,000.00, you pay them a premium for it over time, and voila, you have your $200,000.00 house. By the time you’re done paying for it, assuming you buy now, you will have paid $400,000.00 for your $200,000.00 home. Well, that’s sounds stupid. Why would I do that? Here’s your answer:
When you use a small amount of money to leverage a large amount of money, you have the potential to realize gains calculated on the larger amount rather than the smaller amount. So by the time you’ve paid off your loan in 30 years, it is likely that your home will be worth far more than the $400,000.00 that you paid for it. Let’s say that after 30 years your home is worth $620,000.00. You paid $400K for it, so your $20,000 grew in 30 years to $220,000.00. Not bad.
Stay tuned for the next in this 3 part series…