Leverage (debt) has now become a constant in our society, to the point that the goal for most families is no longer to be debt free, but simply to manage their debt as well as they can, without reaching the breaking point. It's not just families that take this approach though, but companies and even governments as well.
Our society is all but structured so that anyone who wants even a decent standard of living through attending college or university, owning a home and / or small business, etc. has to take on debt, save for the super rich parents who can pay for these endeavors for their children with cold hard cash. The truth though is that even the so called super rich are often in debt themselves. They have massive incomes, but also massive spending.
Managing Debt is indeed a double-edged sword, one that needs to be consistently sharpened and then carefully sheathed. In this debt-filled world, some of these strategies may help you live and even thrive while being in the red.
Not a traditionally considered for leverage, but homes should have considered just that. Like any other investment, a home can rise and fall with the times, which can bring substantial volatility to your overall net worth. While home values have generally trended upward with time, there have been points where the market has seen downturns, and the current period rains to do so as well. A 5% realized loss on the value of your home could result in a loss anywhere from 25-100% of your equity.
The most common form of leverage is through investing, primarily in margin accounts and futures. This type of investing can lead to both great returns and abject failure. The magnitude of the market is much greater than the housing market, and even slight changes that may be seeming nothing more than random blips could cost investors thousands from their margin accounts.
This is the worst form of leverage, with no potential payoff down the line. This is not so much leverage in the traditional sense, but through the act of consuming goods or services now, one inhibits their ability to do so in the future.
Borrowing money for something like schooling on the other hand would have considered a wise lifestyle leakage decision. While schooling gives you no guaranteed return, it will almost certainly lead to greater wages down the line, and most likely make up for the initial loan within just a few years.
In our debt laden society, it can be nice to know that debt can sometimes work for us and not against us, that is why getting your 3 in 1 credit report on a regular basis. Most forms of leakage have risks involved though, and these should necessitate you asking yourself some important questions.
– Can you continue to maintain your current rate of leakage?
– What would happen in a worst case scenario, where your leverage did not pay off?
– What are the potential benefits of the form of leverage you're using, and are they worth the risks?
With a tolerable risk profile, you should be able to take on leverage positively and hopefully take advantage of it. That debt may even one day get you out of debt.