When is Leveraging Appropriate?

Leverage is a popular topic that attracts a lot of attention. Many of the wealthiest people in the world have used leveraging to build wealth. When it is used properly, it can be an amazing productive financial tool.

Recently, AIC mutual funds launched a new website www.upvest.com. This site has some great information about leveraging. They also have a book you can order called ‘Don’t Just Invest, Upvest’ written by Tim Cestnick. Upvesting is a catchy term for leveraged investing.

Leveraging is not for everyone. Before you run out and decide leveraging is the solution to building wealth, I want to share with you some of the ideal situations when you might leverage.

  1. Cashflow rich, asset poor – Are you at the peak of your earning years? Having excess income is essential to leveraging.
  2. House rich, investment poor – For many baby boomers, they have paid off their mortgage and now have excess income for investing. In many areas in Canada, people have used up significant amounts of their cashflow to pay off their homes that they have neglected investing outside of the home. Having a paid off home gives you access to equity for leveraging.
  3. Catching up for retirement – Many baby boomers face the reality of planning for retirement. If you are someone who needs to get serious about investing for retirement but feel you got started a little late, leveraging may be a solution.
  4. Desire more deductions against income – Higher income earners are always looking for ways to reduce their tax bills. Leveraging, if used properly, can provide significant tax benefits.
  5. Higher tolerance for risk (equity based investing) – If you are a very conservative investor who likes GICs and safe investments, leveraging may not be for you. A lot of the benefits of leveraging comes in determining your after tax returns on investments. You need to have a tolerance for equity based investing.
  6. Think long term – Leveraging should not be a short-term plan. Although you can get out of a leverage plan quickly, you should really plan to be in it for a minimum of 5 years.
  7. Financial flexibility – The irony of leveraging is the more financially stable you are, the more likely you are to be able to handle the risks of leveraging. However, it is also the financially stable that may not need to leverage. Make sure you have flexibility from a cashflow and debt to equity perspective.
  8. Little to no non-deductible debt – If you have lots of debt, you are probably better off to pay down non-deductible debt before you take on a leveraging plan.

Is leveraging for you? Unfortunately it is not so black and white. Although it may not be mandatory to have all of these criteria apply to you; most of them should be present.

I highly recommend that you talk to a financial professional to help you determine if leveraging makes sense for your situation. The most important thing to remember is to use conservative assumptions. It’s always better to err on the side of being conservative. Good Luck!

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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