Leverage can be a powerful strategy if used properly. It means that you are using borrowed money to invest.
One of the most exciting things about buying a home is that you can use leverage to make more of a return on your investment. This means that if you buy a house for $100,000 and you only put $10,000 down, if in one year your house goes up in value by 10% that means you have an extra $10,000. This means that you have made a 100% return on your investment! You have doubled your money in one year! Of course the results will vary from house to house, but this is an example of how leverage works. You are leveraging someone else’s money to make money for yourself.
Another way that you can use leverage to your advantage is to borrow money from the bank to invest into your RRSP. For example, if you were to borrow $10,000 and put it into a good mutual fund with good management and a good long term record (14% interest over a minimum of 10 years) and added nothing more to it for 25 years, after that period that $10,000 would have turned into $264,619.16. If you were to invest $20,000 instead of $10,000 you would have $529,238.32. That’s a considerable difference! If you decide to do this, make sure that you do it with caution, and be careful that you don’t borrow money that you can’t afford to lose (or to pay back).
Since I want to have a lot of money when I’m older it might be well worth it for me to think about taking out a loan. If I were to borrow $40,000 and put it into the bank at 14% interest yearly and did not invest even one cent more, I would have 1,058,476.63 after 25 years. That’s incredible! This is an easy way to kick start your investment program or to give it a little boost.
The interest you pay on this loan would be tax deductible, so you would get a chunk of this money back with your tax return which you should ONLY use to pay off your loan. If you were to pay that loan off within 5 years, it will have been well worth it.