Should I Borrow Money to Invest?

Borrowing money to invest is called leveraging.

Avoid Borrowing to Invest

An investor who borrows for investment purposes throws caution to the wind.

Do not borrow money to invest if it can be avoided. Pass on borrowing unless you're confident about repaying the terms of the loan from earnings. The windfall returns envisioned coming from the investment may never materialize. Prepare for the worst scenario. Some investments turn sour.

Some Investments May Warrant Borrowing

Investing borrowed money in a residence commonly occurs.

Home purchases, tuition expenses and business investments are traditionally made by borrowing. Borrowing for our homes or for building our businesses happens routinely. But borrowing for stock or bond purchases--or other risky maneuvers--is not safe. You could lose your investment and still owe money to the lender.

Bottom Line

Debt could be the greatest enemy of your financial health.

Borrowing for investment incurs high risks. Prepare yourself for bumps in the road. Know how you will repay the debt if the investment dives. Also know what effect the borrowing will have on the investor's net worth should the investment flounder. Run the numbers so you stay in the black.

References

• Wise Bread: Good debt, bad debt
• The Adventurous Writer: Borrowing Money to Invest--4 Tips for Achieving Financial Goals

Resources

• Wise Bread: Borrowing to Invest: Helpful or Hurtful?
• "Lifecycle Investing"; Ian Ayers and Barry Nalebuff; 2010