Importance of Leverage in Personal Finance

Leverage means the use of debt or borrowed funds to earn more return on investments. When the return on investment is higher than the interest paid on debt, leverage is beneficial. The use of debt isn't always bad. It depends upon the economic cycle and usage of debt. 

I have mentioned the story of Icarus (Greek mythology) in context with judicial use of debt.

Icarus is a son of master craftsman Mr. Daedalus He has created a Lybrinth ( a complex maze) for King Minos of Crete to imprison the deadliest monster Mintor. However, Minos has imprisoned Daedalus and Icarus in the Lybrinth as punishment for helping his enemy Theseus.

To escape from the Lybrinth, Daedalus has made wings from wax and feathers for Icarus and himself. First, he has successfully tried flying with artificial wings. Then, he instructed Icarus to fly with such wings and follow his path. He further instructed not to fly low or high. If he flies near the sea, humidity impediments flying and flying higher cause more exposure to sunlight, and waxwings may melt. However, Icarus ignored his father's advice and flew at a high level. His wax wings were melted by the sunlight and he fell into the ground.

The same advice of Daedalus is applicable in the use of debt in business or personal life. 

For example, if the economy is under expansion, the transporter is expecting a big order from his customers, he will borrow funds from banks/NBFC and buy a commercial vehicle. The use of debt for asset creation is always beneficial when the economy is expanding/flourishing. 

An employee working with a good company and earning a stable income might look for buying a house by taking a home loan. It would save rental expenses, income tax ( home loan interest and principal repayment is a deduction for tax) and after 20 years, real estate will give him a handsome return.

However, any person needs borrowed funds for fulfilling lifestyle expenses such as purchasing consumer durables, or buying branded clothes, going into a vacation, etc. are too bad. It will increase the cost of living unnecessarily. Further, it reduces his future disposable income. 

Even in times of crises or in recession, leverage is a very bad boss. During crises, a person's regular income falls greatly. He will be unable to manage repayment. It will lead to

• Responding to unlimited collection calls from Banks & Financial Institutions

• Facing collection visits by representatives of Banks & Financial Institutions. It will ruin relationships and reputation.

• Fear of having legal notice will increase stress and invite so many healthcare problems.

• It will after the credit score of an Individual. Lower credit score attracts interest rate. Hence, An Individual finds costly borrowing in subsequent years. 

Hence, one has to use debt judicially in life. It will be a determining factor for one's well being of personal life, reputation in society, and for career or business progress.

I am recommending five personal finance books that describe essential rules for financial discipline. 

1. Rich Dad and Poor Dad
2. You are Badass in making money
3. The Automatic Millionaire
4. How to retire happy, wild and free
5. The total money makeover.