海角大神

There are a lot of tactics that work well in both the personal finance world and the business world. Cutting your spending works in both worlds if you do it in an intelligent way. Investing in resources that will last for a long time is a good tactic in both worlds.

However, there are things that work in business finance that don鈥檛 really work in personal finance.

The biggest one, from my perspective, is the concept of聽leverage. Leverage, for those unaware, refers to any technique that can be used to multiply gains 鈥� but, if it fails, it also multiplies losses. Examples of leverage include borrowing money and using derivatives.

Here鈥檚 an example of what I鈥檓 talking about. Let鈥檚 say you borrow $1,000 with the intent of putting it in the stock market. You put $1,000 of your own money with it and invest it in stocks.聽

If the stocks go up 20%, you鈥檝e made $400. You can pay back that $1,000 you borrowed and you still have $400. You鈥檝e managed to make a 40% return.

At the same time, if the stocks go聽down聽20%, your stocks are now worth only $1,600. You have to pay back that $1,000, so you鈥檙e left with $600. You took a 40% loss. (We鈥檙e not even talking about any potential interest on that loan, either.)

If you make money with leverage, your gains are multiplied. If you lose money with leverage, your losses are multiplied.

In the business world,聽there are many situations where leverage makes sense.聽Most companies use leverage at some point to either build their businesses up rapidly or increase their profit margin.

Here鈥檚 the big secret:聽if leverage fails in the business world, people can (usually) still go home to their house.聽They can still drive their car. They can still live the life that they鈥檝e built.

On the other hand,聽if you use leverage in your personal life and it fails, you lose a lot of those things.People that you owe money to personally will come after your assets. If you鈥檝e leveraged your home (via a mortgage) and can鈥檛 pay the bills, they鈥檒l repossess your home. If you鈥檝e leveraged your cars (via a car loan) and can鈥檛 pay the bills, they鈥檒l repossess your car.

Within a business, leverage has a tremendously nice upside. If you鈥檙e able to borrow money, that means you can get by with a smaller investment in that business 鈥� and if you turn a profit, that means the ratio between your investment and the profit you make is much larger. Your percentage profit can be enormous thanks to leverage.

In personal life, most of the things you purchase for your life aren鈥檛 there to turn a profit. You might earn a small return on your home, but the days of the housing bubble are over. Virtually everything else you buy, from your car to your home entertainment equipment, is going to rapidly go聽down聽in value. From a purely financial perspective, most of the things you spend significant money on in your personal life are聽terrible听颈苍惫别蝉迟尘别苍迟.

So, in business, leverage has a potentially great upside and the consequences of the downside have limited effect on your personal life. In personal life, leverage doesn鈥檛 have that big of an upside and has a potentially strong negative effect on your personal life.

That鈥檚 why聽I don鈥檛 trust people who suggest that others use leverage in their personal life.聽If someone suggests that you personally borrow money in an effort to make more money, I suggest walking away from that idea.

If you really want to borrow money with the goal of making a profit from it,聽start a business and have that business borrow that money.聽Set up the business so you have minimal personal liability.

Don鈥檛 ever risk your personal situation to chase a dream of getting rich.聽Don鈥檛 take on personal debt in a pure effort to make more money. In fact, avoid personal debt entirely.

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