No one actually in the real sense wants to stay in debt for any reason. However, one way on the other we find ourselves in debt sometimes. No wonder they exist many TV shows, books, and magazines that devote to teaching people how to avoid debt and pay off debts. Meanwhile, do you believe debt can be a good thing if properly used? This is why we have shown you ways debt can make you money herein.
Yes, the motive of going to borrow in the first place may be relative. Nonetheless, the principal way of utilizing debt to invest positively includes the use of leverage to exponentially multiply your returns.
Now, you may ask what does it mean to leverage exactly? Leverage means using borrowed money to boost your return on investment (ROI). Leverage can enable you to achieve returns that you thought can never imagine, however, at a greater risk of losing your capital.
If you want to learn different ways debt can make you money through the use of leverage, then carefully read through this page.
The Differences Between Good Debt And Bad Debt
Before proceeding, we see it important to make you understand what we mean by ‘good’ debt and ‘bad’ debt.
Good Debt involves the type of debt that enables you to acquire assets that will increase in value. They often deduct the interest of the loan from tax. Hence we refer to them as tax-deductible loans. Thus, you can use the income you derive from the asset to repay the debt.
Some examples of such loans include;
Meanwhile, Bad Debt includes the type of debt you use to buy goods, services, or assets that have no potential to generate any income and/or depreciate over time. The interest of the loan is non-tax deductible. Therefore, you don’t have any income from the asset to pay back the debt.
Some examples of such loans include;
5 Ways Debt Can Make You Money
#1. Margin Investing
Margin investing allows you to buy a higher amount of stock than you have money for. For instance, if you had $10,000 in your traditional brokerage account, you can leverage your investment by opening a margin account.
Furthermore, margin accounts let you put up a max of x50% of the purchase price of a stock. With a margin account, you can have $10,000 in cash and through leveraging your broker can loan you an additional $10,000. Thereby your $10,000 investment gives you $20,000 worth of buying power.
When the stock price appreciates, you can then pay back the loan and keep the profit. However, it has a negative impact if the equity in your account falls below a certain value. Then, your brokerage firm will issue a margin call. If you don’t meet up with the margin call because you don’t have enough funds, your broker will liquidate your entire position of the stock. This will in turn leave you with losses.
#2. Leveraged ETFs
Leveraged exchange traded funds (ETFs) enables traders and investors to amplify their returns by going long or short on a particular index.
Available ETF brokers and companies will provide you with funds to leverage on. You can use these funds to invest in specific indexes, bonds, commodities, or sectors. When the market booms, you can make many high returns with leveraged ETFs that other investors crave.
However, a problem includes that although the same way leveraged ETFs work for you they can still work against you. Unless you have great skills at trading in and out of these funds, leveraged ETFs can magnify losses by wiping out your entire investment in a few days.
#3. Hedge Funds
One of the biggest users of leverage is the Hedge funders. We highly recognize them for generating abnormal returns by using leverage. Many hedge funds can leverage up to 10 times their total assets. A billionaire hedge fund manager like John Paulson has used leverage to turn accredited investors into multimillionaires.
However, if the fund manager’s investment plans go wrong, it can push a hedge fund out of business and lose the capital of all investors.
#4. Short Selling
Have you ever carefully listened to/watched a financial program on TV or radio and heard them say it’s time for you to short the market? This means the time to bet against security. The term for describing this is “Short selling”. It is a popular way of staking against a particular security by borrowing shares from an investor and selling them in confidence that the shares decline.
Many short sellers have made quite a fortune by properly timing shorts in stock prices. The downside to short selling includes the fact that losses are unconditional. This means that short sellers can lose much more than the initial investment if the market doesn’t go in their favor.
#5. Forex Trading
Trading Forex consists of one of the ways debt can make you money as it enables investors to control large blocks of currencies with a small amount of money. Investors trading on currency pairs can leverage up their accounts 100:1. The most significant advantage of currency trading involves how you can take a small amount of money and turn it into a huge sum of profit very quickly.
A good example of how rich Forex trading can make you include looking at George Soros (“man who broke the Bank of England”) who made $1 billion by betting against the pound. On the contrary, Forex trading has the potential to wipe out a trader’s entire account in a matter of minutes.
Frequently Asked Questions On Ways Debt Can Make You Money
Is debt used to create wealth?
Yes, you can use good debt to build long-term wealth. However, Bad debt can harm your credit and weaken your finances. The major difference between these two includes two factors: risk and cost.
What is the best thing to do if you are in debt?
If you have gotten yourself into debt and ready to get out, consider the following steps;
- Pay more than the minimum payment required to pay installmentally. Just go through your budget and agree on how much more you can add toward your debt repayment.
- Try the debt snowball.
- Settle for less than you owe.
- Refinance debt.
- Commit windfalls to debt.
- Re-examine your budget.
How much debt is too much?
The amount of loan considered too much is relative to individuals. However, to determine how much loan we can call to much for a person we have to look at the debt-to-income ratio If their monthly income.
Conclusion
Finally, borrowing may go against traditional reasoning because debt appears as a downward pull on an individual’s finances. However, if you properly use and managed it appropriately, debt can help you grow your financial health.
You just need to tread on the careful path or ways debt can make you money and see yourself in the sky. Many prominent companies and industries today borrowed some time to grow to this point.