I am often asked this question and I feel the urge to ramble on for hours about the mathematical intricacies of leverage and debt ratios etc…

But here I am going to just say..

YES

Borrow to invest.

Here are a few reasons why.

The interest on the loan is tax deductable
The money will be earning maximum Dividends right away
You are protecting yourself from your greatest enemy - Yourself

This is awesome. Some might argue that borrowing to invest is foolish because the interest you pay on the loan offsets or nullifies that gains that you make. Not really, because that interest is tax deductible. This means that you will pay less tax, which in turn is more money in your pocket. Without any math at all, I can figure out that is a good thing.

But because I LOVE math, are is our example, which I will run with for the entirety of this article.

Suppose you have a goal of having $100,000.00 invested. This would provide you with a good starting point to grow your wealth in many different ways

So you have the choice ;

Save a little each month and invest until you have $100,000.00
Borrow $100,000.00 and pay it off over time

SCENARIO 1

In order to save $100,000.00 in 10 years you would need to save/invest

$647.82 per month.

If you include earning 5% interest and re-investing it.

So if you borrowed 100K at 6% interest and invested it

Payment Every Month

$1,110.21

Total of 120 Payments

$133,224.60

Total Interest

$33,224.60

Wait?! WHAT?!

So if I save to get to 100K it costs me 647 a month, but if I borrow it will cost me 1110 a month? Over 10 years?!?

Screw you, Peri.

Hang on. We have a bit more math to do.

The two scenarios are not apples to apples. We are neglecting to include a few things:

Interest tax deductions
Dividend/interest payments
Dividend/interest taxes

Scenario 1 assumes a 5% compounding - but we neglected to include the tax you will pay on the interest/ dividends.

Scenario 2 assumes no return on investment at all and no tax deduction from the loan interest.

TOO MUCH MATH

So let me put the brakes on right here..

I can explain all the math and make my case but I don’t believe that math is going to amount to a hill of beans here.

We are not talking about computers, we are talking about humans. Real people, with real people problems trying to get ahead financially in the world.

Because we are flawed as computers and as money managers for the most part, we need to factor in the most important data - our tendency to make stupid decisions when it comes to money.

We make all kinds of financial decisions based on emotions, feelings, impulses, and flawed logic. We spend to impress people. We spend to make ourselves feel better when we are down. We spend because we have been influenced by advertising and salespeople.

There are a ton of terrible reasons to spend and/or waste money that we might not even be consciously aware of. This is the key point.

We can set out to “save” $647 a month to build our nest-egg with the best of intentions, but what are the odds that we will actually have the self-discipline and grit to stick with it, in spite of all the emergencies, impulses and distractions that come along?

That’s what I thought.

If we are being honest with ourselves, we are probably going to find a reason to skip a contribution or two along the way because something else came up. It is too easy to make a different decision when we constantly have a choice. It is similar to when you are on a diet and you still have cookies in the cupboard. It is too much of a temptation. We need to set ourselves up for success by removing all of the temptations as best as we can, in order to save ourselves from ourselves

This is why a $100,000.00 loan would be a better idea for many of us. It forces us to be disciplined and make those payments every single month for fear of default. We make ourselves accountable to our future selves AND to the bank. We function much better as a species when we have defined parameters to work within. We are not always our best selves when we have no deadlines, or constraints, however intangible they might be.

Also don’t underestimate how great it will feel to have 100K invested and earning you passive income every month. It will change your whole mindset and actually help you to make better financial decisions, knowing that you have a cushion.

More Math

Having said that, I want to continue the math portion of our adventure because it might take a little bit of the sting out of the loan payment idea.

If we invest 100K in a good dividend paying stock, we can earn about 5% per year without much trouble. This extra 5K can be used for

Paying down the loan faster
Buying more stock.

In both cases we are accelerating our gains. If we were to include the 5K in our monthly payments we would decrease the 120 month payback time to 75 months (7 years 3 months)

If we were to invest the additional 5K per year it would compound and you would have $164,361.95 at the end of 10 years. Far exceeding your 100K and enjoying a $683/month dividend payout. Not bad.

Reality Check

I realize it is difficult to get a 100K loan from any bank, especially if you are just starting out. We all must start from where we are. That is perfectly OK, as long as we start. Borrow what you can afford. Use a home equity line of credit. There are many options.

I have written about how to pay off your mortgage faster in my book, Invest in Yourself. If you use that strategy in conjunction with this one you can build your wealth super fast.

Taxes

I have not gone into the tax implications of this as I am not qualified to do so. Seek advice from a tax professional and make sure you ask a lot of questions. I will say, that I know there are tax benefits to dividend income and tax deductions for borrowing to invest, but the rules are different from country to country. Find out the best scenario in your particular corner fo the world.

So my reasoning behind my suggestion that borrowing to invest is the way to go is twofold:

The math makes pretty good sense.
We suck at making money decisions

I would argue that reason #2 is the more compelling argument.

In the book “Scarcity” they discuss how flawed our thinking is when it comes to money:

“Money, at least to some extent, is also judged relative to background. That’s why we care more about saving 40 percent on a $20 book than about saving 1 percent on a $1,000 refrigerator”
“We pinch pennies on small items, yet we blow dollars on big ones. Our frugality is thereby largely wasted. We spend hours surfing the web to save $50 on a $150 pair of shoes. Yet we forgo a few hours’ search to save a couple of hundred dollars on a $20,000 car.”
-Sendhil Mullainathan and Eldar Shafir. “Scarcity”

This is the problem. We cannot trust ourselves to consistently make rational, fact-based decisions about money management because we have too many arbitrary biases towards money based on our backgrounds, financial status, and proclivity to impulsivity. Yet the world of money and finance lives and dies by math and math alone. (Yes, the stock market is controlled by perception to a degree - but mostly valuations and earnings )

So by using leverage or “other people’s money” we are also setting ourselves up for success. We are forcing ourselves to build our fortunes in spite of our bad behaviours and this is the key. Do all the math you want, the true value in investing for the long term is actually doing it. There is no magic formula other than consistency over a long time. This will make you rich.

If you are interested in how you can invest in a dividend portfolio, sign up for my newsletter. When you do, you will not only receive periodic updates and tips from us, you will also receive a free “How to invest in stocks” guide that shows you some examples of great dividend bearing stocks and how to use dividends to your advantage.
I hope this has been helpful.