1. Some say debt is good. Others swear that borrowed money causes misery. 2. Debts, when used wisely and free from emotion, can yield good financial harvests. The implementation however, is not as easy as it sounds. 3. Investing is not for everyone. Many end up losing money due to greed (not cashing out when due) and fear (cashing out too early). If these twin emotions are not manageable, stay away from investments, especially, borrowed investments. 4. So back to debts. Is it good to borrow or should investments be funded with savings only? 5. Let’s analyse the case of two Accountants who are in similar earning capacity and age group but with differing opinion when it comes to creating an investment portfolio. 6. Accountant G is in his mid-30’s and has fully settled his housing loan within 5 years and his car in 2 years. He opines that settling loans as fast possible and saving on the interest via high down payment and lump sum periodical deposits are in itself good returns on investment. 7. Today, he has no loans and truly living a debt-free life. His cash savings are at a decent level equivalent to 9 months living expenses and he fully owns the house he lives in with his young family. 8. The other, Accountant A is highly geared with loans exceeding Rm3m and is the owner of 10 properties. All the properties were acquired over a period of 7 years and are generating rental income over and above the respective monthly instalments. 9. When asked, Accountant G says that he is unable to purchase any new properties as prices have moved too fast and even if he could do so, his nature of borrowing as little and short as possible makes it financially untenable. 10. Accountant A has emergency funds amounting to 3 months expenses and wishes he has more liquidity. He however, has no regrets stretching his loans and cash to capture properties just before the wave came. 11. Looking at these two cases, who is better off financially? 12. From a liquidity sense, Accountant G wins hands down. There is no debts, no instalments, hence no worries. He however, is regretful for not being alert to ride on the property wave despite Accountant A’s advice years ago. 13. Accountant A has amassed great wealth via property appreciation and has made paper-profits exceeding 100% on almost all his properties. He is cock-sure that his units will continue to generate rental as they are of prime location. He does confide however, on the worry of servicing the loans should a financial crisis occur. 14. Hence the trade-off between returns and liquidity. Liquid assets generate lousy returns and vice versa. The key is striking a balance. 15. Before venturing into hard assets, ensure that there is sufficient liquidity to withstand financial shocks. Funds should be split into separate accounts, one for unforeseen circumstances and the other as seed capital to acquire assets. 16. This way, the usage of funds from one account will not affect the ability of the other. One is able to grow the Balance Sheet and still have funds for emergencies. 17. Back to our Accountants. In a rising market, the one who bought with very little debt loses out. In this case, his unwillingness to borrow. The available fund was used to finance only a single property. 18. By the time the first asset was settled, prices moved up by leaps and bounds. He could only be a mere spectator as his time has passed. The only thing is to look out for rare unappreciated gems that may or may not come. The consolation is that he is cash rich in an inflation fuelled economy. 19. The obvious winner is the one who capitalised on cheap finance and borrowed just as the market was rising. It was a gamble but as long as the asset generated returns and his income allowed such a loan, then it is a worthwhile risk. 20. In conclusion, when investing or wanting to invest, one needs to keep abreast with the pulse of the economy. Know when to leverage on loans and when not to. Experience is a good teacher but other people’s experience is a better teacher.
Posted on: Sat, 07 Sep 2013 12:03:40 +0000
Trending Topics
Recently Viewed Topics
© 2015