Every day we make choices. We usually make the choice that carries the least amount of risk. Sometimes we do this to stay in our comfort zone, but other times we do this because we know what’s good for us. Most people don’t willingly put themselves in a dangerous situation because there is a risk of injuring themselves or even causing death. (There are some situations we will gladly put ourselves in that we know are dangerous, like trying to save our children or our spouse or even a random stranger. But in these situations, we don’t consider the risk for us because of what’s at stake.) When it comes to our finances, there are some risks worth taking and there are some risky investments that we want to avoid. We all have a risk meter of sorts that we use to keep us out of bad situations.
It seems there are some people who have taken their risk meter, intentionally damaged it and put it back in their pocket, and it no longer works for them. These people try to sell us risky investments because their risk meter no longer works. You need to make sure your meter works.
Leverage on Real Estate
The first thing I want to discuss is regarding leverage on real estate. I think they use the term “leverage” because who doesn’t want to make something easier? Leverage helps us move heavy obstacles. A lever is one of the six simple machines that make our life easier. Leverage in real estate or investing is a fancy word that means debt. We have already determined that the best way to build wealth is to get rid of your debt. This includes your personal life and your business life if you own your own business. There is no doubt that some people make lots of money on real estate using leverage. However, the only people that banks foreclose on are the ones who carry a mortgage on the property. There is risk with leverage.
I am not referring to buying a house with a good down payment. Although that is still financing, some people will try to convince you to buy an additional house to rent out by using the equity in one house as a down payment. This is when your risk meter should be sounding the alarm! This is the leverage I am talking about. Realtors will try to convince you that leverage is good. The reason is that they make a commission and don’t carry the risk. Some realtors are good people like the one I used when I purchased my home. Unfortunately, some people in that industry have taken their own risk meter out and intentionally broke it. It must have beeped at them too many times and annoyed them! People want to get rich so quickly that they throw caution to the wind and ignore their risk meter.
Borrowing for Stocks and Businesses
Some people borrow not only to invest in real estate but also to invest in stocks and businesses. One argument The Great Depression in the United States occurred was because people borrowed to buy stocks. This worked fine as long as the price of stocks kept rising. We can blame the depression on the government who allowed people to do this, or people can take responsibility and blame themselves for causing it. I’m sure there was enough blame for everyone. The bottom line was that debt caused an asset bubble that eventually had to pop.
Some people start a small business with debt, and some people buy businesses using debt. In both cases, the debt causes any mistakes they make to multiply. Instead of just losing money on their business, they have so much additional debt they become bankrupt. Instead of saving for a few years to have the required capital to start their business they just get a loan. Again, some people make it big doing it this way, but too many others fail and have a pile of debt that they need to clean up.
Instead of starting a business or purchasing a business from someone using debt, try looking to see if you can work for that business for a few years with the intention of buying it. This gives you experience with running the business, and it gives you an income so you can save to purchase the business.
Stay away from other risky investments like single stocks, commodities, and cryptocurrencies. The reason these are risky Investments is because you either have all your eggs in one basket, as with single stocks, or the investments are very volatile like commodities and cryptocurrencies. Commodities are risky because of factors like weather and politics. Cryptocurrencies are a risky investment because it’s not mainstream. Don’t invest in something you do not understand, and don’t invest in something because it’s cool. If you own these risky investments already, don’t panic. Talk to your tax advisor to see what your best exit strategy should be.
Avoid risky investments. Most people invest in risky assets because they are trying to win the lottery and get wealthy overnight. Building wealth is a long-term process. Make sure your risk meter is working, because some of the people who try to sell you assets have broken theirs.