Let’s examine cash rich corporations so that you can understand where I’m coming from, and not misinterpret what I’m trying to convey.
Apple, Facebook (Meta), Alphabet (Google), Berkshire Hathaway (Warren Buffett) have 1 thing in common. They have plenty of cash reserve, yet they have debts as well. Why do you want to borrow money when you have money to pay it off easily?
While there are many reasons for doing that, such as reducing the foreign currency exchange risk by issuing bonds denominated in the country which you plan to invest in rather than using your own currency and money, swap it to invest , let us focus on the main principles behind this action.
If you borrow money for personal consumption, which is not going to help to grow your assets, I think that will be a downward spiral for your financial situation. Poor people borrow money for things which are unproductive. They borrow money for home renovation, for the house which they are going to stay in. Rich people borrow money for home renovation as well, to increase their house value for which they intend to sell once renovation is completed. Poor people borrow money to buy a car for personal and family convenience, while rich people borrow money to buy the car, and lease it to the others.
Now we know what the rich does with the borrowed money; they borrow it to make more money. However why do they want to incur loan interest when they can buy it with their own money?
The first reason is the cost of borrowing is lower than the investment return of their savings. If their investment is giving them a 6% , while borrowing money cost them 4%, it make total sense to borrow it. You leave your investment untouched and let it grow and compound.
Second reason is, when you borrow money to make money on your business venture, you are able to offset those loan interest from your profit. Hence you pay lesser taxes. If you use your money to fund your business venture, Uncle Sam is not going to accept your “lost in interest” as a business expense.
Third, by borrowing, the rich maintain their liquidity position and hence is always ready to pounce on any great opportunities to invest in, or they always have ready funds to survive any crisis upcoming.
The poor borrow money because they have no money. The rich borrow money to grow money.
Debts is good when you make the money productive, but it’s very bad when you spend it on things which won’t grow. Of course, just like many asians, I grew up in traditional family and I have been taught that debts are bad, and don’t take loan. If you do, pay it back fast. I did that when I was 30 by fully paid my condo. I thought debts are bad, and I feel uneasy with paying loans and bills. That’s why when the bill come, I pay it off fast. When there’s opportunity to pay off my loan in full, I did it. I felt great after that. It was good feeling, until I realise what I have been missing out.
While I’m not advocating everyone now to take on debts, and the phase “debt-free” is still deeply ingrained in my DNA, what I thought you can take away from this post is this; If you ever need to take a loan, make sure the money is spend on the assets which may grow in value over time.
You define what those assets are. Some think that taking a loan for study or for their kids education is a good investment. If you think that’s right, good for you. You may be right as a parent, that after graduation from Harvard University, your son co-work with some other genius in the varsity, co-found a company and became the next Unicorn. Well, I don’t know how much Joseph Schooling’s parent invest in their son for his swimming venture, but I do know that investment bring back Singapore’s first ever Olympic Gold Medal. Sponsorship came flocking after that.
Hence there’s no defined terms on what is the right investment, but if you decide to take a loan today or in future, think harder on whether that money can potentially help you to grow or not.
Getting rich slow 