Business News

'Leverage' explained

Published on: Monday, March 08, 2010

It is often thought of as doing more with less. If you put your money in a bank deposit, it is very safe but you don’t get a real lot out of that leverage decision. However, if you decided to do a building development where you put say $1 million of your funds down as ‘skin in the game’ money and the bank lent you $4 million, you have got more leverage out of your money. When people take out margin loans they are trying to increase their leverage, but you have to be careful that you don’t over-leverage and escalate the risks. Leveraging is all about making your money work harder and it generally involves using loans to give yourself exposure to higher returning ventures. The really smart operators learn to wisely and safely borrow to invest in potentially high-returning projects or investments, while utilising the tax system to reduce the effective cost of the exercise. This is why I say everyone should have a good accountant and financial planner to explain the options that exist out there given your risk profile. That said, if you don’t like the risks that go with the leverage, then opt for something safer.

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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.