When someone mentions needing leverage, what comes to mind? Being that I work in the oilfield, the first thing that I think of is a cheater pipe. This is a tool that is placed on the end of a pipe wrench used to provide additional leverage. The leverage comes in the form of additional force to tighten or loosen bolts or a section of threaded pipe. For investing, leverage is referred to as investing a small amount of capital or borrowing capital that yields a higher return in relationship to the money needed for the investment.
If you have ever taken a seminar on investing, I am sure that you have heard the catch phrase “Other People’s Money” thrown around like it is easy to obtain. One way we can leverage our capital by using “Other People’s Money” is obtaining a loan from a bank for an investment such as rental property. When applying for a loan you want the best credit score possible. A credit report is a good tool you can use to help you manage your credit rating.
Leverage – When investing, you want to leverage your money. By leveraging your capital, you can maximize your returns for your long term investments. This will allow you to grow your investments faster and on a larger scale. My primary concern with leveraging capital is growing too fast. If you are like me, you will stretch your resources to begin investing. Although I have an exit plan for my investments to keep myself from getting in trouble with my finances, I can see how easy it would be to grow too fast once you have a little success with your investment strategy. I caution anyone leveraging their capital not to grow too fast. The last thing you want to experience is an unforeseen problem with your strategy that would cause you to ruin your credit score. Always do your due diligence prior to leveraging your capital. As you obtain more experience in investing, you will be able to increase your leverage. Avoid being reckless with your investments.
Other People’s Money – This is a catch phrase that everyone likes to use when talking about investing. “Other People’s Money” is a form of good debt. This money typically comes in the form of a loan or credit. When planning to use “Other People’s Money” to leverage your capital, your return on your investment must be higher than the interest applied to the capital borrowed. When I use “Other People’s Money” I try to forecast excessive cash flow in order to reinvest in my investments.
Credit Report – One advantage of managing your credit through a credit report is to monitor your credit. A credit report will help you determine if someone has stolen your identity which could ruin your credit. It also shows your weaknesses in your credit report which could help you work on areas in an effort to lower your credit score. The higher your credit score, the lower your interest rate you qualify for when applying for loans to leverage your capital; therefore, it is imperative that you have the best credit score possible to maximize your investments. For more information on credit reports see my guest blogger report Know Your Credit Score.
I try to focus on investments that allow me to leverage my capital. I also try to invest in assets that I have more control over. Although I do invest a small portion of my capital in the Stock Market, I do not use the Stock Market as the primary vehicle for financial freedom. The fact that we have limited control of the stock that we purchase and we cannot obtain a loan to invest in the Stock Market is the reason the Stock Market is not my preferred vehicle for my investments.