Investing is a great way to build wealth, especially in a financial hub like Singapore, where investment opportunities abound. While there are plenty of affordable investment options, most of them cost a pretty penny.
This is the reason folks consider borrowing money to invest. The idea of using someone else’s money as capital to build personal wealth and accumulate assets can be very attractive and quite tempting. However, before going that route, one must understand the risks involved.
The Risks of Borrowing to Invest
Borrowing money from a legalised money lender in Singapore to put in an investment vehicle comes with certain risks.
- Leverage: Borrowing money to invest amplifies both gains and losses. The biggest risk of taking out a loan to fund a potential investment is losing more money than you put in. If things don’t go as expected and your investments go down, your debt won’t go away. You will still owe the lender the money you borrowed with interest rates in tow.
- Interest Costs: Interest is the price you pay to borrow money. If your investments don’t perform well enough to overtake the interest rate, you end up losing a lot of money.
- Market Volatility: The thing about investment vehicles is that most of them depend on the constantly fluctuating market behavior. If the market goes down, it will be challenging to sell your investments, making loan repayments quite difficult.
When Is Borrowing to Invest Okay?
While borrowing to invest does come with certain risks, there are also times when it makes sense, like the following:
- Long-Term Investment Horizon: Borrowing to invest makes plenty of sense if you intend to keep your investment for a long time. In most cases, as the market grows over time, your investment’s value also increases. This growth helps offset your losses and the interest you’re paying.
- Portfolio Diversification: Acquiring different types of investment vehicles and assets is a great way to safeguard your wealth accumulation. If one of your investments tanks, you still have other assets that will help you manage your losses until you recover.
On a side note, you need to build an emergency fund before you take out a loan from a bank or a local lender, like a Hougang money lender. An ideal emergency fund should be at least six months’ worth of your living expenses. This gives you a healthy buffer to help you deal with unexpected expenses without putting your other financial obligations on the line.
Factors to Consider When Borrowing to Invest in Singapore
As a borrowing investor, you need to consider the following factors before you go shopping for a loan to fund your investments:
- High Living Costs: Singapore is known for its high cost of living, with a huge chunk of its residents’ monthly expenses going to housing. If your budget is already maxed out, a loan might not be a good idea for now.
- CPF and Investment Schemes: Singapore has unique savings and investment plans like the Central Provident Fund (CPF). You might want to look into what you can get out of your CPF before applying for a loan.
- Tax Implications: Investment gains are generally tax-free in SG. However, the interest you pay on your loan is not deductible, which could significantly impact your finances.
Wrapping It Up
Borrowing money for investments can be quite risky. However, under certain circumstances, it does make sense. Carefully evaluate your options and think it through. It can be a great way to build wealth if you do it right.
Always consider your financial situation, investment goals, and risk tolerance before making any decisions. We also recommend consulting with a qualified financial advisor to ensure you get proper guidance about these matters.