How to Borrow to Invest During Inflation

Inflation can actually help eat away debt when investors use borrowed money to buy assets that increase in value.

Borrowing to invest can be a risky yet rewarding endeavor. It makes sense to invest with borrowed money if you believe the investment return will be higher than the interest cost of the money you have borrowed. Investing with borrowed money during inflation will greatly increase your gains because inflation causes the value of a dollar to decline and forces the price of the asset to rise higher than the amount that was initially borrowed to purchase it. Inflation will effectively destroy the debt.

Instructions

1. 

   Borrowing for real estate can be a winning strategy during inflation.

   Find a house you want to buy and obtain a 30-year mortgage. The real value of the fixed mortgage payment declines over time with inflation. For example, let's say you lock in a 30-year fixed mortgage for $100,000 with payments of about $1,000 a month and you are earning $60,000 in annual income. After 10 years let's assume you are earning $100,000 a year and the house value has grown to $150,000. Inflation over that time period would have caused your house to be worth more, and since the fixed payment remains the same it takes a smaller chunk of your salary to pay it.

2. 

   Borrowing to buy stocks during inflation can supercharge your returns.

   Find a stockbroker and open an account that allows you to buy stocks on margin. Instead of paying full price for the stock, you can borrow much of the cost from your broker. Suppose you buy 100 shares of a stock for $40 and through inflation it rises to $50. If you bought the stock with your own cash, your $4,000 investment would have increased to $5,000 for a return of 25 percent. But if you bought the stocks on margin using only $2,000 of your own money and $2,000 borrowed from the broker, your return would be 50 percent. You risk only $2,000 of your own money to earn a $1,000 profit.

3. 

   Inflation can be your friend when borrowing to invest in hard assets like gold.

   Take out a personal loan either from a bank or from your own 401(k) retirement account and then contact a reputable gold coin dealer. Buy 1-oz. investment-grade gold coins and store them either in a bank safe deposit box or a home safe. The price of gold will increase during inflation and your gold will end up being worth more than the debt. You can sell the coins back to the dealer, pay off the loan and keep the net profit--preferably to use for another investment.

Tips & Warnings

• Buy durable goods and commodities rather than bonds and bank CDs.

• Buy investments you are familiar with.

• Do not borrow to invest with money you cannot afford to lose.

• Invest for the long haul rather than quick profits.

• If the rate of inflation is higher than the rate of return you are receiving, your investment is actually losing money.

• Steer clear of borrowing to buy bonds. Inflation destroys the value of long-term bonds.

• When buying stocks on margin you can potentially lose more money than you invested.

References

• The Secret Power Within Your Mortgage: Protect Your Net Worth During Inflation
• SEC: Margin Rules Related to Stocks
• Economic Times: Is It Wise to Buy Gold With Borrowed Money?

Resources

• Understanding Inflation: So What's to Worry About, Anyway?