Why debt is good for you
It is a commonly held view that debt is bad for you but there are certain circumstances in which debt can be good for you.
Take for example mortgages. Most people need a mortgage to buy a property. Without the ability to borrow money most young people would be unable to get onto the property ladder.
Furthermore the monthly mortgage cost isn’t usually much higher than the monthly rent which would otherwise have to be paid anyway. Also at the end of the mortgage term you get to own an asset, a house, with no debt. Not a bad result, eh?
How about interest free credit? Even if you have the cash to buy a car or furniture why not buy it on interest free credit instead especially if the purchase price is the same? The cash you would otherwise have used to buy these things could be invested to make you more money.
A further useful way to use debt cheaply is an interest free credit card. Again, even if you have the cash to buy something why not buy it on an interest free credit card instead? At the time of writing, one lender is offering an interest free credit card for 30 months for balance transfers from other credit cards. The transfer fee is 3%. As these cards tend to be balance transfer cards you would need to buy the item on a normal credit card before transferring the balance to an interest free credit card.
Borrowing money to invest is known as gearing. It is even possible to borrow money against a share portfolio, typically 50% of the portfolio’s value, and pay a low interest rate to a bank of as little as 3%. Bearing in mind the yield on the FTSE 100 Share Index is currently 5% this is a pretty clever way of borrowing money cost effectively as the income from the share portfolio is likely to cover the interest cost of the borrowing.
There are even investments that use gearing, or borrowing themselves, to enhance their investment returns such as investment trusts and Exchange Traded Funds, ETFs.
So is borrowing bad for you? Not necessarily. It depends on the situation. If you are able to borrow the money in a low cost way, especially interest free, and you have the means to repay it when the interest free period ends then it usually makes sense to buy items this way. The key is to be sensible when borrowing money in this manner.
So if you would like advice on how to use debt as part of your investment strategy why not get in touch with me? You know it makes sense.