Business planning – beware the borrowing trap

How’s this for poor business planning?  When someone goes completely broke, it’s almost always because they borrowed money.  Ironically, it is not the poor who fall from grace and go broke.  This is because generally the poor can’t borrow money easily.

It is those with higher income and easy access to borrowing who at most at risk.  In many cases, it is also those who should know better, such as financial professionals in large companies.  But there is no accounting for greed!

Borrowing money is also glamorously referred to as ‘leveraging’.  Borrowed money comes in many forms – e.g. personal loans, secured loans, margin loans, mortgages, and credit cards.

Borrowing money to invest instantly puts you at risk to lose more than your original investment.  The recent Global Financial Crisis (GFC) has demonstrated that.  It’s just that when viewed through the rose coloured glasses of a booming economy, it doesn’t look that way.

Borrowing money for personal reasons (non investment) is financial suicide.  The risk is high from the start because whatever it is you buy with the borrowed money (e.g. a car) makes no income and therefore contributes nothing to ease the repayment burden.

It sounds old fashioned but if you handle all your financial affairs and investments on a cash basis, it is almost impossible to lose everything, no matter of what unforeseen event may happen in the world.

Until next time!

Gary

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