“The old saying that ‘success begets success’ has some truth. It is that feeling of confidence that can banish negativity and procrastination and set you off on the right track.” -Donald Trump
Gearing is defined as the way to borrow money to invest. Before making any investment, it is a good idea to pay off any outstanding debt you have. That way, you can invest in a stress-free environment and you don’t need to access your investment money to pay off debt.
There will be times when an investment occurs for which you do not have all the money. Gearing helps you increase your original investment amount while increasing your potential earnings. Gear also increases the risk associated with investing.
Negative gear
Negative leverage refers to when the interest you pay on your money investment loan is actually higher than the income you receive from your investment. For example, if you borrow money to buy a rental property, however, your interest payment each month is more than the rent you receive on the property. However, you can claim the negative gear as a loss on your taxes. This will allow you to deduct it from your income and pay less in taxes. Obviously negative leverage is not the best option to invest in, but it is an option.
It is similar to saving 50 cents on every dollar, but you have spent a dollar to save those 25 cents. The logic is definitely hard to follow. The reason people use negative gears is that they predict how much the investment will be able to sell. They hope they can sell it for more than they bought it. Any income that is made from the investment can be reduced by the money that is spent on negative gears.
If possible, don’t borrow money against your own home for an investment. Especially if the stock or bond options are speculative and you are a new investor. Owning a home is a great investment in your future. The houses act as savings accounts, offering you tax breaks and money shelters. Losing your home to a bad investment will leave you with lasting guilt that you probably can’t get rid of.
Margin lending is defined as when an investor borrows money to invest. The extra money allows you to invest more and hopefully increase your earnings. Make sure that if you borrow money, the investment will allow you to pay off the loan and the earnings. Why invest if you are only breaking even?