by Aurie

Created on: April 18, 2008

I am in my mid-twenties and I had a great conversation on my blog about financial plans at this age. The question was: "Is it better to pay cash for everything or take out loans?" It is almost always better to pay cash than to take a loan for obvious reasons. However, for the young investor out there, one can use credit to leverage their hard earned cash assets in order have their money make an additional source of income for them. Putting out all cash for the purchase of certain items are not always the wisest decision when you consider some alternatives.

Some people have ways of investing in avenues that give their cash more bang for the buck and also helps them reduce fees and they find more value in that rather than being totally debt free. Of course this is not the solution to everyone's financial picture. It would be naive of me to make that statement. However, managing debt is great skill to develop because if you are not filthy rich, it becomes more and more difficult to acquire things without using credit. It is my opinion that a home loan or home equity loan is usually a good type of debt to have if it is a must have. There are usually tax advantages to be had on the interest that you pay on these loans on an annual basis around the tax season. Cash secured loans also afford the opportunity to get great rates of interest because you are lending cash to the bank instantly. In doing so, they can offer a very low rate of interest and as you pay the loan back, the money becomes available to you after each payment. What I am saying is that the rates of interest on these kinds of loans are normally very low in comparison credit cards and other unsecured loans with high interest and high fees. All of this analysis assumes having great credit or good credit. This is only one side of the story.

Here is the other side. At this point, assuming that you have gotten a great rate of interest on a secured loan, you can now take the cash you have available and tie it up into investment vehicles that can hopefully beat that interest rate that you are paying on the loan. The net interest margin profit between the loan and the investment gives you another source of income. Investments can be done in a variety of ways. Some people invest in stocks, bonds, mutual funds, & CDs. Others invest in rental properties, commercial buildings, and other real estate ventures. However, all an investment does, at the end of the day, is to give you rate of return on your principal deposit. It could be 1%, 5%, 8%, 20%. There is always risk with doing this and that is why there are so many people who dedicate their professional lives to its analysis, forecasts, and proliferation of the news surrounding it.

So, let's look at the situation again. Now you have your regular job that gives you a paycheck and a financial portfolio that gives you an interest income benefit and sometimes a tax advantage also. Of course you have pay taxes on all of these things which can help you get ahead or still leave you at where you started. It all depends on the situation. However, if you calculate precisely what your tax basis is, you can make a great estimate of what your new net worth would be with the loans and investments versus just paying cash for everything all the time. You might be surprised.

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