In personal finance Profitably Leveraging Debt has always been a controversial topic. Often it is considered to be avoided whenever possible. So is Debt good or bad? Actually it can be used to build wealth when used with proper planning and objectives. In this article we will discuss a few tips about how to use debt to make money.
What is Debt?
Debt, essentially, is money or something of value that one party owes to another. Many individuals and companies use debt to make large purchases. Without it, these purchases would otherwise be out of reach. Unless forgiven, this debt must be repaid, often with interest added on.
Tips to build wealth
Debt consolidation
Debt consolidation combines multiple debts to save on interest and fees. For example, you can increase your mortgage to pay off high-interest debts, such as credit cards and personal loans. This approach can keep your repayments unchanged. Meanwhile, you leverage the lower mortgage interest rate, thereby reducing your overall debt costs.
Maximizing Your Savings
A common practice is to store money in a savings account for emergencies, providing a sense of security. However, placing this money in an offset account linked to your mortgage could be a smarter choice. This strategy allows you to earn a higher after-tax return. Simultaneously shortening your home loan’s term, all without restricting access to your funds.
Optimizing Cash-flow Management:
To minimize bad debt, employ strategies aimed at reducing interest payments. Firstly, consider making more frequent mortgage payments or increasing payment amounts. Additionally, redirecting your salary into an offset account can be beneficial. Another option is utilizing a credit card’s interest-free period for daily expenses. These proactive methods effectively free up funds for your home loan, ultimately avoiding extra interest.
Smart Use of Lump Sums
When you receive a lump sum, such as a bonus or inheritance, you might want to use it wisely. You could pay off bad debt. Alternatively, consider making extra contributions to your retirement fund.
Debt recycling
This tip transforms your mortgage into an investment tool. As you pay off your home, you can redraw equity to invest in shares or property, turning bad debt into income-generating good debt. This income can help repay the loan and may provide tax benefits. Additionally, any extra income can speed up your home loan repayment, saving on interest.
Hedge Fund
A hedge fund pools money from private investors, managed by professionals using diverse strategies for higher returns. It’s seen as risky and typically demands a high investment, aiming at affluent clients.
Forex trading
Forex trading enables investors to manage large currency volumes with minimal capital, offering leverage up to 100:1. This means small investments can potentially transform into substantial gains quickly.
Things to remember
Every Profitably Leveraging Debt-based investment strategy carries risk, so finding the right approach is essential. Only borrow what you can repay. Used wisely, debt can enhance wealth, offer cash access, and help build credit. It’s important to understand borrowing risks and use debt responsibly, not habitually.