Chapter 6Borrowing to Invest
What Is Leverage?
The majority of the wealthiest people in the world have, at some point in their lives, relied on borrowed money to create their wealth. This is why leveraging, or borrowing to invest, deserves a chapter of its own.
In a nutshell, borrowing money to invest is like doing what banks do. Banks take the money we deposit, pay us an interest rate, and then go off and invest in something else, generating a potentially higher rate of return. It's known as the concept of using other people's money (OPM).
The most important aspect of leverage is that it is a blade that cuts both ways: it can offer massive financial benefits or become a major financial burden. The key is to use leverage prudently, investing wisely in the appropriate investment accounts within disciplined and certain time frames, and to make sure that it is suitable for your specific risk tolerance.
Leveraging can be used to improve your long-term effective rate of return within your corporation assets, or help build your non-registered assets.
In this chapter, we explore how leverage can enhance returns in the corporation, assist in removing funds outside of the corporation with offsetting deductions, and make your mortgage tax deductible—but we'll also look at the downside of leveraging.
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