How to Get Out of Debt - Don't Invest In Something You Don't Know
Do you have friends or people you know who are in the finance industry? Have you been asked to borrow money to invest in something that will have "guaranteed" return over the future years? Have you said yes to an offer to borrow something like $50,000 or $100,000 to invest in mutual funds or stocks and were promised to gain positive return on investment?
There are 3 simple rules for you to remember:
- Rule #1 - There's Absolutely No Guaranteed Investment
- Rule #2 - Never Borrow Money to Invest
- Rule #3 - Never Invest in Something You Don't Know, with Your Own Money or Not
No One Can Guarantee Positive Return on Investment
You may have been exposed to the idea of how you have been losing money even though you are putting your savings in the bank, simply because of the growth of inflation being higher than your growth on investment. Sounds familiar? "Financial planners" always tell people to invest. They talk about inflation and how much you'll ever make in your life time if you continue to work for the rest of your life.
Investing is good, but it is also a form of gambling. Instead of putting your money down on the table in a casino and hoping the dices will roll to the right numbers, you are simply putting your money into someone else's pocket hoping they will be able to invest your money in mutual funds, stocks...etc., to gain positive return over time.
Markets change. While there are companies that will gain positive market share and stock value, there are companies that will gain negative market share or even go bankrupt; we see it happen every day. There are plenty of financial planners around us, and most of them, don't make money on their investments. Talk is cheap. Don't get overwhelmed by your own greed and fall into believing everything people say. No one can guarantee positive ROI, well, unless they can see the future. There are experienced financial planners who are better in "predicting" the future by studying past trends and company operations. However, not a single financial planner is able to say "this is how it's going to happen".
If no one can guarantee 100% on positive ROI, why do you believe it?
Never Borrow Money to Invest
Here's the thing, so you have been convinced that investing is necessary to secure your future. That's fine. But now financial planners will tell you something about "snow ball effect", where if you roll a snowball with the size of a baseball down a hill, it will become as big as a basketball at the bottom of the hill. But if you roll a snowball with a size of a basketball to begin with, it will become a snowball as big as a car at the end of the hill.
If you invest $10 and gain 10% ROI in 5 years, then your investment will be $16.11 in 5 years. But if you invest $100,000, then your investment will be $161,051.00 in 5 years.
Let me put you in another perspective:
If you borrow $10 at an interest rate of 5%, at 10% ROI for a period of 5 years:
- You will pay $2.76 in interest
- Your investment will grow to $16.11
- Your profit is $3.35
If you borrow $100,000 at an interest rate of 5%, at 10% ROI for a period of 5 years:
- You will pay $27,628.16 in interest
- Your investment will grow to $161,051.00
- Your profit is: $33,422.84
If you borrow $10 at an interest rate of 5%, at 5% ROI for a period of 5 years:
- You will pay $2.76 interest
- Your investment will grow to $12.76
- Your profit is $0.00
If you borrow $100,000 at an interest of 5%, at 4.5% ROI (more than putting your money in bank) for a period of 5 years:
- You will pay $27,628.16 in interest
- Your investment will grow to $124,618.19
- Your profit is -$3009.97
If your ROI is anything lower than 5% (your interest rate), you will lose money.
Therefore, if you borrow money to invest, you are not only betting on your financial planner to have positive ROI but also the ROI will need to be higher than your interest rate. Besides, if you borrow money from a financial institute, it will show up in your credit history and will most likely be an issue if you are ever planning in getting a mortgage or financing a car.
Never Invest in Something You Don't Know
Borrowing money to invest is not always a bad idea. It really depends on what you invest in. The concept is no different than business start-ups, where people borrow money from investors. But do keep in mind that 90% of new business start-ups fail. It's similar with investments where at least half of the people who invest will lose money. The markets will balance themselves where if one makes money, there's got to be someone who is losing money.
Therefore, to know what you are getting into, you can't invest blindly. Even if you hire a financial planner to invest in mutual funds on your behalf, you need to know a lot about mutual funds yourself. If you want to start a business, you need to know the inside outs of how the business works. If you want to hire someone to start a business, you also need to know the inside outs of how the business works so you can better monitor/manage your partner.
So to conclude, you need to have the following mindset:
- There is no guaranteed positive ROI investment.
- The more money you invest, the more risks associated with your investment.
- Always invest with your own money or borrow money from family members. Avoid borrowing money from financial institutions with interest rates.
- Never, ever, invest in something you are not an expert in.