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Gearing, otherwise known as borrowing to invest or leveraging, is the strategy of borrowing money to purchase investments and it is one of the most common wealth creation strategies.
Gearing can lower your personal tax liability - by how much will depend on your personal situation and the type of investments you choose.
The main benefit of gearing is that your investment balance is bigger. This means the potential dollar returns will also be bigger but gearing only pays if your returns are greater than your borrowing costs.
Some of the ways you can use gearing to grow your wealth include:
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Margin Lending - using shares and managed investments as security for further investment.
- Home Equity Lending - use the available equity in your home to borrow for further investment.
- Geared Share Funds - some investment funds are internally geared which means that the manager uses borrowings to provide potentially greater investment returns.
Gearing offers potentially great rewards but also has the potential to magnify your losses if the value of your investments fall. For this reason, careful planning is key to you achieving the rewards on offer from a good gearing strategy.
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