Home Equity is Another Form of Leverage
by: CadenFlynn |
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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 constantly 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.
Home ownership
Not a traditionally considered for of leverage, but homes should be 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 upwards with time, there have been points where the market has seen downturns, and the current period threatens 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.
Investing
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 volatility of the market is much greater than the housing market, and even slight changes that may be seemingly nothing more than random blips could cost investors thousands from their margin accounts.
Lifestyle
This is the worst form of leverage, with no potential payoff down the line. This isn't 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 be considered a wise lifestyle leverage 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.
Using leverage
In our debt laden society, it can be nice to know that debt can sometimes work for us and not against us. Most forms of leverage have risks involved though, and these should necessitate you asking yourself some important questions.
With a tolerable risk profile check you 3 in 1 credit report for more info, 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.
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About the Author
Caden Flynn frequently contributes to http://www.debtjerk.com. Knowledge you can use for everyday living on the subject of 3 in 1 credit report.
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