Early in my career, my future father-in-law advised me that I should get to know my banker. At the time I didn’t really understand what he was saying but 30 years have gone by and I think I am starting to understand. Ok so I’m a slow learner [grin].
My wife and I are both employed as software developers and as such make reasonable salaries. We have always spent within our means, but the world is setup to encourage people to spend beyond their means. There are several ways to look at this as either an opportunity or a trap.
The bank wants to employ smart individuals to invest wisely and make them money. My mother used to always say that you have to have money to make money, but that is not really the case any more. Bankers and people who have finance backgrounds know all about maximizing their money, investments and net worth to maximize their returns. I guess that would make them good people to know…
An example of what I mean might be how the bank is always calling me up to offer me more money. They want to charge me interest of course (See a previous post on usury) and my wife and I are not really interested in increasing our debt. People with finance backgrounds might look at this completely differently. If my wife and I were to take a loan to buy an investment property where the income exceeded the mortgage, we could actually create another income stream. If the property stopped making money, we could always sell it and extract our equity (hopefully it would increase in value).
This and much of what today’s banks do could be considered usury which would make it bad, but if this exercise provides shelter for someone who would not otherwise have an affordable place to live, things become grey. My point here is that as an engineer I would not consider leveraging my net worth to borrow money to make money. I do have skills that would make me a better than average land lord and I would enjoy having a property to work on. Making some money for my efforts is not an unreasonable expectation and it is very likely that I could renovate an existing property and create some much needed rental housing.
So is it reasonable to borrow money to make money?
This post gave me much to think about Fred. It is strange to make money from money. I wonder if there is a way that the bank could share in the risk when they lend money. Lets say you borrow $10k against $10k of your own money. If you make $4k profit, bank takes $1k lets say, but if you lose $4k, then the bank loses $2k as well. This way, the bank might be more strict in lending out money but then shares in the risk and reward as opposed to guaranteed return on their money via interest. The ratios would have to be worked out though to be fair to both parties!