LEVERAGING

 

Leveraging is borrowing money to invest. Most people call it OPM or Other People’s Money. This is very tricky as it can magnify your gains or losses. But, if you’re sure of the investment vehicles you will invest your money to, then leveraging is a thing for you.

Here are ways you can use leveraging to your advantage:

1. Leveraging from your Credit Card’s credit limit. Let’s say you own a small business with fast moving goods. You can dispose all your items in less than 30 days. Using your credit card to purchase raw materials, allows you to use the bank’s money as your capital. Granting you have a credit limit of Php60,000 and use it for purchasing raw materials for your baking/food business. Purchasing all these items right after your cut-off date, gives to approx 50 days before your due date. Since food items are fast moving goods, and granting you’ve sold everything in 30 days with a decent profit margin of 30% — in effect, you’re ready to pay up your credit card debt even before your due date. Since you pay everything in full every due date, the credit card company charges you with nothing. This is like putting up a loan for Php60,000 in 50 days with 0% interest.

2. Taking up a loan with small interest rates and investing it with higher gains. Let’s say you’re a member of a cooperative, and your coop allows you to put up a loan and only charges for 10% p.a. interest rate. If you bring your money to fixed income tools that will yield definite and higher returns, then you have leveraged from your coop’s money. Several Rural Banks offer higher interest rates for long term placement, ranging from 12% to 20% for a 5-year placement. If your investment will gain 12%, and your loan is at 10%, then in effect you gained 2%, and this is not even your money. I suggest extra caution when you try this type of leveraging. Never invest your borrowed money in something that will not yield definite and fixed returns — like mutual funds and stock market, as you can’t afford to lose your principal. When investing borrowed money, always protect your principal, and your gains should always be higher than your loan’s interest rate.

3. Flipping Real Estate Properties. Though, this is not for everyone as it takes a lot of skills, many people use this type of leveraging to earn high profits. Let’s say a bank is selling a condo unit (foreclosed items)for 1M, and gives the full control to the successful bidder with only 10% downpayment. This means, you only need Php100k to take control of the property and pays the monthly bank amortization. You can now improve it and shell out some extra money to boost the sale value, or sell it as is for a profit. Let’s say, you flipped the property by shelling out another Php50K for some improvements, but sold the unit for 1.5M. This is a clear profit. You dont have to be a millionaire to close a million-peso sale/deal.

Though, the above examples seem very easy. It takes careful analysis before one can pull off a profitable deal. You have to be 100% sure that your investment will protect your capital, and your profit will always outweigh your loan’s interest rate. It not, then don’t risk using other people’s money — as this can make or break your credit rating.

CREDIT CARD TIPS

 

 

Use Credit Cards to your advantage. Most often than not, we hear people saying — get yourself out of debt. And when we speak of debt, a common employee sees it as CC debt. Skyrocketing outstanding balances from multiple credit cards as a result of impulsive buying. Just like money, CC is not all-together evil. It’s how you use it dictates whether it’s an ally or enemy. If you regard your credit limit as your additional purchasing power, and your ability to buy things from impulse, then CC will definitely turn out to be your enemy. In no time, you’ll find yourself buried in a large pit of outstanding balance, which may take years to pay-off. On the other hand, if you regard CC just as a tool to protect yourself from carrying large sums of money when shopping, and source of monthly financial statement of your purchase to keep track of your cash flow, then you’ll have the CC on your side. Not everyone knows the benefits of using CC and how it can extend your money’s flow.

 

Tips

1. Make majority of your purchases (especially those big ones), right after the end of every billing cycle. For example your billing cycle ends every 28^th of the Month. This means that the CC company will close your books and start computing for your monthly statement. All purchases made after your billing cycle will be reflected in your next billing cycle, therefore you have the entire month plus 21 days (usually the time given to you by the bank to pay on your due date).

 

Cut-off Date = Sept. 28

Statement printed = Sept. 28

Due Date = Oct. 19

 

Purchases = Sept. 29

These  purchases will not be reflected in your billing statement dated Sept. 28, in fact it will be reflected in your next billing statement on Oct. 28.. What does it mean? Items purchased last Sept. 29, will only be reflected in your next statement come Nov. 19 (next cycle’s due date) – that in effect gives you 51 days before you payoff your CC debt. Other people might think, so? You still have to pay off your debt.. YES, but you’re provided here an opportunity to make use of your money and maximize it’s potential (min time deposit can run for only 30 days).

 

1. Don’t be a revolver; pay your CC debts in FULL every Billing Cycle. Most CC companies highlight that you can only pay as low at 5% from your outstanding balance to be a revolver. TRUE. That’s why most people find it easy to charge their credit cards every time they feel the urge of splurging, besides they only have to pay for 5%.. and the rest.. God knows when they’ll have the money to pay it off in full. If you pay in full every due date. You’ll not carry any finance charge.. meaning the cc company loaned you all your purchases for 51 days (if you made your purchase after your cut-off) and it’s for free.. no charge at all.. now who gives you something for free nowadays? Again, either you use your CC to your advantage or disadvantage, that’s always your option — Don’t think CC cards will not earn anything if you pay your balance in full every due date – they charge at least 5% to the merchant (so they will still earn – business will always be business)

 

1. Don’t buy something, which you can’t pay for cash after 51 days.  Again, your CC credit limit is not your purchasing power. Normally, banks give you very high CC limits so that you’ll be enticed to buy expensive things. Buy only items, which you can pay with your actual CASH. Therefore, it pays to maintain a monthly budget, based on your monthly take home pay. This way you know how much you should charge in your card, and eventually pay in full after 51 days.

 

1. If it’s inevitable that you really have to buy those expensive appliances, avail of the 0% interest paylite of CC companies. This makes it easier for you to own expensive stuff without unloading too much cash at one time. But, keep in mind these monthly installments should be counted in your monthly purchases and not counted on top of your monthly budget. If you committed 2000 pesos for that TV, then you have to cut something from the other parts of your monthly consumption to compensate for the extra 2k you added in your monthly purchases.

 

1. CC companies give you the most comprehensive CC statement every month. They don’t fail in giving you these statements since they have to collect from you. This is a free monthly statement and accounting of your purchases. You don’t have to hire an accountant to balance your books. As much as possible utilize this tool to take control of your purchases. It itemizes all your purchases to the last detail. Utilize it so that you can control your expenses. Every time you see items of wants than needs, it’s a signal for you to better shape up, otherwise your losing much cash out of nothing (remember, whatever happens always pay your balance in full every due date)

 

1. Having a credit card helps you establish your credit rating or history – better be a good payer –- this will come handy when you opt for bigger loans in the future like auto loan or housing loan.