Many personal finance experts answer this question based on the math. They figure if we borrow from one party to invest the money and make a profit, that makes sense. After all, you’ll beat the interest rate you’re borrowing at, right? In theory this is a wise move. But is it the best? Let’s explore this question in greater detail and look at the pros and cons.
The Faith Perspective
The Bible has many things to say about debt. As Christians, shouldn’t we consider what the scripture says? Read this powerful verse:
“Let no debt remain outstanding, except the continuing debt to love one another, for whoever loves others has fulfilled the law.” -Romans 13:8 NIV
It’s clear that God doesn’t want us to be in financial debt, and surely wants us to avoid new debt. Instead, the Lord calls us to love one another – this should be our only continuing debt. One might question why the Bible teaches against the use of debt.
Debt: Pros vs. Cons
We talked about how some financial counselors recommend going into debt in order to invest at a better rate. While this looks like an attractive benefit, consider these cons:
- Debt incurs more risk. The longer you hold onto your debt – the longer you owe someone something – the more power they have over your life and the greater the chance you won’t be able to pay it back. This is a major risk. Think about all the homes that have been foreclosed on in the past few years. Nobody saw it coming before it was too late. Never forget that debt always incurs more risk.
- Debt incurs higher costs. When you take out a loan, you’re going to pay interest. Sometimes this interest becomes so great, it makes your bills unaffordable. Who wants to spend money to spend money?
- Your investment might not outpace your loan. Companies fail, stocks crash, and you might end up with a huge problem on your hands. If your return on investment falls below your loan’s interest rate, you’re in trouble. It is my conviction that the person who invests should already be completely out of debt and have a large fully-funded emergency fund.
Sure, some people have had success borrowing money to turn around and invest. But ask yourself, do you think this is the norm? Is this really the best strategy out there?
The Tortoise Approach
We all know the story about the tortoise and the hare. The hare runs fast, jetting past his friend the tortoise with amazing speed. He wants to outpace the tortoise and teach him a lesson or two. But soon, the hare gets tired, complacent, and decides to munch on a nice juicy carrot.
Meanwhile, the tortoise sticks with his philosophy – slow and consistency wins the race. Sure enough, much to the hare’s surprise, the tortoise inches ahead to proclaim victory.
This is much how investing is: slow and steady wins the race. Don’t try tricks and gimmicks to beat your fellow man. Just do what he’s not doing: be consistent. If you’re in debt, blast through it. If you need an emergency fund, get it started! Soon, you’ll have the financial foundation you need to soundly invest your money.
I’d love to hear some feedback on this question. Do you think it is a smart move to borrow to invest? Maybe you have a different perspective than the one I offer. What’s your opinion? I used to argue that borrowing to invest could be smart in some circumstances, but now I believe that is not the case. Write us a quick note in the comments section. We’re waiting to hear from you!