Tuesday, July 10, 2007

How do I get the money to invest?

Reader's Question: How do I get the money to invest? I read a book recently by Robert Kiyosaki, who wrote the bestseller, Rich Dad, Poor Dad. He teaches the advantages of borrowing money to invest, such as getting a mortgage loan, rather than using your own money. Bad debt makes you poor, but good debt is leverage that makes you rich, because it allows you to invest sooner. He swears by it. Any thoughts?

As you indicate, there are two basic sources of money for investing--your own money and other people's money (so-called OPM). Your own money can come from sources as diverse as cumulative life savings, your most recent paycheck, and dividends and profits from your own investing. Common examples of OPM, used for both investing and consuming, are credit card debt, car loans, real estate mortgages and loans or investment capital that can come from family, friends and others in partnerships.

Getting Started With Your Own Money

Often in life, what's most important is getting started on the right foot. In the case of investing, this means putting some money aside, however small, and setting up a suitable investment program for yourself.

To extract "seed capital" for investing, the place to start is with your own personal income statement. You need to arrange your personal finances, so that your income from all sources exceeds your total expenditures. Practically speaking, this usually entails a combination of elements such as:

  • Income Side: Finding a job that pays better, asking your boss for a raise, saving the incremental pay you receive from your next raise, taking a side job to earn extra income, saving any money gifts and cash bonuses you receive, training (or retraining) yourself to work in an occupation that offers a higher salary, etc.;

  • Expense Side: Moving into a house or apartment that has lower rent, finding a roommate, renting out rooms in your own house, driving a reliable but affordable car, going out to eat less frequently, spending vacations closer to home, looking for sales when shopping, buying necessities and not luxury items, etc.

  • The point is that you've got to figure out a way to save some money that will serve as the "seed" to start investing. You might think that $100 or $1000 is "small money," particularly if your financial dream is to become a millionaire, multi-millionaire or billionaire. However, for the sake of your own long-term financial health, you must, as early as possible, establish personal habits that are conducive to wealth-building. In my opinion, successful investing really begins with having the discipline to "live within your means," spending less than you earn and thereby continually augmenting your investment capital. Once you are a prudent manager of your own personal money, you can begin to supplement your investment portfolio with other's people's money.

    Using Other People's Money

    Having access to sources of money other than your own, which typically means borrowing or using OPM to leverage your own capital, can potentially produce higher investment returns. Some authors (like Kiyosaki, as you cite) make a distinction between: "good debt," like a mortgage on rental property, which can be serviced using rent paid by tenants; and "bad debt," like an auto loan, which you might take out on a new car and now have to service with your own money. Others distinguish between good debt on appreciating assets, like real estate and stocks, and bad debt on depreciating assets, like cars and elegant wardrobes. Still another useful point of view is that good debt produces cash flow, while bad debt does not.

    To these dichotomies between good and bad, I would add a measure based on lowest cost of capital:

    Good debt is necessary borrowing within reasonable risk limits at the lowest available cost of capital, regardless of source, so long as the expected return on your overall investment portfolio exceeds your cost of capital. Bad debt is borrowing that doesn't meet the specified good debt requirements.

    Here are some examples to help illustrate:

  • New Graduate in New Job: You've recently graduated from college and taken a career-oriented job. Your income from work is enough to cover your rent and living expenses, make payments on your student loan, and save a few hundred dollars each month. You are eager to start investing in stocks, have faith in Steve Jobs' leadership, and want to buy Apple (Nasdaq: AAPL), thinking that the stock will continue to rise on the strength of the company's newly released iPhone and upcoming lower-priced model. Your available sources of investment capital are: $2000 in a savings account, a cash advance on your credit card at 18% interest, or a private loan from a friend who says you can pay him back in a year with interest in arrears at 10%.

  • My suggestion: Continue to save what you can from your paychecks. In a year's time, when you have a few thousand dollars more in savings, reconsider making the proposed investment if you still have the same outlook on Apple's business prospects. Neither the 10% private-party loan nor the 18% credit card loan is attractive, since your investment return could easily fall shy of these levels if Apple's sales or earnings falter or the stock market sags on unencouraging macroeconomic news. Also, you ought to maintain a few months' living expenses in your savings account, as a buffer against unpredictable changes in your job situation. Be patient. During the upcoming year, you might find even better investment opportunities than what you are seeing today.

  • Homeowner Buying a Car: Suppose you are buying a factory-certified, pre-owned Toyota Prius, since your gas-guzzling minivan has blown an engine gasket and you are in dire need efficient wheels to get around. To pay for the car, you have three choices: sell $15,000 of stock or other investments, borrow on your home equity line at 8% APR, or take out an auto loan at 7% APR. Based on the bad-debt-on-depreciable-asset thinking, you would eliminiate the auto loan from consideration. The bad-debt-if-you-have-to-service-it-yourself thinking would knock out the home equity line choice as well, leaving only the investment liquidation alternative. But you don't really want to sell stock that you currently own, since you feel confident that you can continue to achieve returns higher than 7% on your investments, since you've been averaging 10% over the past seven years, through both down (2000-2002) and up (2003-2006) markets.

  • My suggestion: Assuming you are comfortable with the additional portfolio leverage and have adequate cash flow to cover the debt service payments, take out the auto loan, since at 7% it is your lowest available cost of capital and is lower than the 10% return you expect on your investments. Think of the auto loan as not a wasteful loan on a depreciable asset but as your most efficient way to borrow funds within the context of your overall portfolio.

  • Investor Considering Second Mortgage on Investment Property: You have been out looking for investment property and have found a $500,000 apartment building that looks attractive and will, at 75% loan-to-value, provide positive cash flow with an expected 10% total return. Banks will lend only up to 65% loan-to-value ($325,000), and you can take out a second mortgage for the remaining 10% ($50,000). The interest rate on the second loan is 9%. You may alternatively tap your home equity line at 8% interest to come up with the remaining $50,000 needed to buy the apartments.

  • My suggestion: Even though the home equity line directly involves payments that you will have to make on your house instead of on the apartment investment, it is your lowest available cost of capital. Therefore, go ahead and tap the equity line on your house, and proceed to make a back-to-back loan into your investment property with terms matching your home equity loan. By effectively transferring the financial burden from your house to your investment property in this way, you achieve your lowest cost of capital and optimize your expected investment return on an overall portfolio basis.

    Crossing the Finish Line

    Investment capital, then, comes from a combination of your own money and other people's money, with the mix depending on your situation. A few key tenets to keep in mind are:

  • Savings: Anyone who is seriously interested in starting to invest ought to be able to save some money. Even putting aside just $100 a month is enough to begin to accumulate significant capital for investing.

  • Patience: However eager you may be to begin buying stocks or real estate, realize that market opportunities will change but will not go away. Getting started a year from now with investment amounts and risk levels that suit your own financial situation is better than rushing to get started today with excessive leverage or using other people's money on terms unfavorable to you as borrower.

  • Risk Management: So much of successful investing is risk control. Of course, we all seek higher returns, but knowing how much and on what terms to borrow is important. Do not borrow at rates that are higher than you can honestly achieve through your investments.

  • I think it is helpful to view investing as a life-long race in which you lead with your own money and add, as follow-on, other people's money when you can do so prudently. Relying solely on your own money, you may end up growing your net worth more slowly but you'll never go bankrupt and you will finish the race. At the other extreme, relying too much on OPM, you could grow rich quickly, but you also run the risk of losing it all and never crossing the finish line. Ultimately, the art of successful investing involves pursuing the optimal path at each stage, walking the fine line between too conservative and too aggressive.


    Blogger 4MySales said...

    Great post and great guidance on locating sources of investment capital.

    Generally, you can do a lot more and make a much larger return using other people's money. Unfortunately, most people do not have the necessary network to access this type of capital.


    11:29 PM, July 10, 2007  
    Anonymous Anonymous said...

    Be Alerted to the Hottest Stock Picks!!
    Join Emerging Growth Alert Newsletter !

    By joining the team at Emerging Growth Alert you will be in position to receive stock alerts profiling stocks about to move or already in motion. Our alerts are sent in time for you to research, investigate and make a decision about whether this opportunity is right for you. You will not be bombarded with junk mail. There is ABSOLUTELY NO OBLIGATION, and the service is entirely FREE.

    You may think this is spam but this is only an invitation for those interested to receive Stocks alert – ONLY stock alerts... Thanks to those who subscribed :)

    5:54 PM, January 21, 2008  
    Anonymous Anonymous said...

    I recommend read some of the investments basics before make any investment.

    5:09 PM, July 11, 2008  
    Anonymous Anonymous said...


    I’m sure all of us use Google or Yahoo to search for info all the time but are you PAID to do this ? Well, if you want to get paid to search for info on the net, then register an account in just 2 minutes here. No guarantee yeah as this is my second day use this ;)

    You don't have to download anything besides Only required a IE7 or Firefox.


    You are paid on average 1.5 pence per search you make. So if you make just 10 searches per day, you will be earning £4.50 or about $9 per month !

    And it gets better ! You will earn on all your downlines 3 levels deep !

    If you refer just 20 others and all your referrals do the same and everyone make just 10 searches daily, you will earn £1,008 or about $2,016 per month !

    What happens if everyone do more than 10 searches daily or referral more than 20 ?

    You earn much much more ! Basically your income is UNLIMITED !

    And it’s residual – you get paid month after month after month !

    You are paid once a month by check or Paypal. Minimum to get paid is just £20 ! Don’t delay ! Register an account now ! It’s free !



    12:27 AM, September 23, 2008  
    Anonymous Anonymous said...

    I think the best way is still to save some little money day by day. Never borrow money to invest~~~

    9:12 AM, December 12, 2008  
    Anonymous surianame said...

    very nice blog
    I like it
    may i resumme your article in my blog please ?

    thank you for visiting mine


    11:34 PM, July 06, 2009  
    Blogger Unknown said...

    "...The art of successful investing involves pursuing the optimal path at each stage." Very well-said, Lloyd. I think personal wealth boils down to successful self-management and assessment of wealth flow. Before I moved in to Alberta, best mortgage deals are my top priorities until I was able to find one that really works for me, thanks to my mortgage broker.

    Now with an Alberta home loan to pay, I am thankful because I was able to save up significant money from my past paychecks and other income, while enjoying the investment that is my house.

    12:30 AM, October 06, 2010  
    Blogger Ebay Tips 4U said...

    there are many inverstor looking for good oportunities just need to have the correct investment that will catch their eyes and you will have you money to invest if it is a good oportunity and once you return the investment you will have more people that will like to invest in you ventures

    11:27 PM, October 26, 2010  
    Anonymous Anonymous said...

    Im inspired with the exceptional and instructive contents that you provide in such short timing.
    advantages of roll over iras

    9:38 PM, February 20, 2013  
    Blogger Unknown said...

    I appreciate the ideas of Long-Term Investment . This is very nice article and have great information.

    2:30 AM, June 15, 2013  
    Blogger jason haris said...

    I loved reading this piece! Well written! :)

    Hotel Room Investments

    8:26 AM, July 02, 2013  
    Blogger Unknown said...

    Very good blog, thumbs up...
    useful writing for finance students.Check this video for more clear picture.buildtruewealth.net

    10:25 PM, June 02, 2014  
    Blogger Unknown said...

    Well if you want to invest money you can take loan. In USA the craze of youngsters are increasing in real estate investment. You can take loan in low rate from Lee Arnold System. One of my friend told me about this. thanks

    5:30 AM, October 17, 2014  
    Anonymous income fund said...

    Learning how to master your money is the only way for getting rich.


    income fund

    1:56 AM, May 18, 2016  
    Blogger StarIndia Equity Tips said...

    This is very important now a days to be full proof before getting in a scam on online or any other tricks.

    Commodity Trading Tips
    Nifty Future Tips

    4:46 AM, October 17, 2017  
    Blogger Adele said...


    Almost everyone who is making money online has gone through months (or even years) of trial and error...

    They've also spent thousands of dollars to test out the correct ways to make money online.

    But ask yourself - do you REALLY want to go through of all these pain, expenses and frustrations?

    Here's the shortcut for you to make real money online now: ==> What is the shortcut to making real money online?

    If I had this opportunity when I first got started, I would definitely be making more passive income.

    With this shortcut, you get to clone an internet millionaire's entire internet business.

    ==> More than 100 ordinary people made money online...

    Talk soon,


    P.S. Hundreds of people have made money with this system.

    You can be one of them too (see the real proof here):

    ==> Have Your Money Make More Money

    4:56 PM, December 13, 2017  
    Blogger Unknown said...

    Almost everyone who is making money online has gone through months (or even years) of trial and error...

    They've also spent thousands of dollars to test out the correct ways to make money online.

    But ask yourself - do you REALLY want to go through of all these pain, expenses and frustrations?

    Here's the shortcut for you to make real money online now:


    If I had this opportunity when I first got started, I would definitely be making more passive income.

    With this shortcut, you get to clone an internet millionaire's entire internet business.


    11:17 PM, July 22, 2018  
    Blogger StarIndia Equity Tips said...

    Making a right changing market trading for a set a moving moments.

    NCDEX Tips
    Stock Cash Tips

    5:33 AM, May 24, 2019  
    Blogger Jane Morrison said...

    Hi everyone, I've seen comments from people who have already received a loan from Anderson Loan Finance. I really thought it was a scam and I applied for a loan based on their recommendations because I really needed a loan. A few days ago, I confirmed on my personal bank account the amount of 12,000 euros that I had requested for a personal loan with a rental percentage of 2%. This is really good news that I am happy with and I advise anyone who needs a real loan and who is certain that they will repay the loan to contact them via email.

    They can lend you a loan!
    Please contact Mr. Anderson Ray
    Email: andersonraymondloanfinance@gmail.com
    Email: andersonraymondloanfinance@hotmail.com
    Phone: +1 315-329-6320
    The office address @ (68 Fremont Ave Penrose CO, 81240) ..


    12:38 AM, May 17, 2020  

    Post a Comment

    << Home