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Borrowing and Lending Money: Do it the Right Way
By admin | June 4, 2008
Recent mails from clients reporting unfortunate experiences, and items in the news reminded me of the saying “neither a borrower nor a lender be.” How many of you knew that this quotation is from Shakespeare’s Hamlet? And how many of you knew how the phrase continues?
For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.
In this case it doesn’t take a great literary critic to figure out that Shakespeare is really referring to loans between friends and family. They are to be avoided. You might well lose both the money and the friendship. (Though if you want to terminate the friendship, you might consider a small loan a good investment!)
My view is that sure you can be a borrower and a lender.
Gearing (borrowing money to invest) is an excellent way to grow your wealth with conservative investments like real estate or currency sandwiches.
But what you absolutely must not do is borrow money and then invest in speculative investments. Recently a client of mine in the UK mortgaged his home to the hilt, then lost the money in one exotic real estate deal. Now he has nothing and is stuck with a huge loan to pay off, otherwise his family will lose their home. Don’t ever do that! If you really want to “release equiry” I’m not absolutely against it, but at least spread it across a broad range of different investments. “Don’t spend it all at once,” as they say.
Lending money on a commercial basis is also an excellent idea, if done properly. But don’t just do it yourself, least of all to friends and family. Leave it to a professional like a banker. There are many ways of doing this correctly and thereby reducing the risk. Three of these ways I like right now are:
- Starting with very little money, those in the UK, Italy, Japan and the US can sign up with zopa.com, the world’s first ’social finance’ company, kind of an eBay of banking that aims to cut out the middlemen (who are in this case the banks)
- Another interesting idea is investing in commercial microcredit businesses. This is an area I’ve been studying, and indeed investing my own money in, for some time. You can do this through publicly quoted businesses in countries such as Brazil and Mexico. I’ve doubled my investment in the past year on this.
- Finally, for the high rollers (I’m talking $100K upwards) I currently have some attractive commercial paper paying on average 15% annual return in USD and EUR. This program is run by a $6 billion bank. Note I don’t say it’s guaranteed by them, but it is run by them and they will take on some of the risk with you. They do know what they are doing and needless to say everything is fully legally documented. There is, of course, a risk. The bank says you should never put more than 5% of your assets into this kind of investment. At least the risk is clearly researched and documented and, in my professional opinion, small. Oh, and, did I mention, this transaction would have to be done through an offshore company so it’s private, offshore and tax-free?
If you’d like more specific info on any of these three investments, by the way, I’ll be writing an article about them soon for Q Wealth subscribers and my consulting clients. I’ll also be talking about them at forthcoming events in Andorra and Panama.
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