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Don’t Borrow From the Bank, Borrow From Yourself

by John Grace

Retailers are delighted to report on the news that consumers spent a record $9.12 billion in online shopping on Black Friday 2022, an increase of 2.9% year-over-year, according to Adobe Analytics. The figure catches many by surprise with the continued fears of a recession and an inflation level not seen in the last 40 years. Just before the 2022 midterm elections, almost 50% of Americans declared inflation or the economy to be the most important issue in their voting deliberations, making kitchen table money matters by far the most commanding, per an ABC News/Ipsos survey.

It is interesting to note that billionaire, Amazon founder Jeff Bezos, who has a great deal to gain from Americans’ addiction to spend, baby spend said, “People should stop buying big-ticket items right now,” per Entrepreneur. Bezos went on to say, Americans should hold off on major purchases like new cars and televisions in the event a lengthy economic downturn may be baked in the economic cake. Indeed the hi-tech industry may prove to be the canary in the coal mine with some of the largest companies shredding employees like Twitter laying off about 3,700 people, nearly half its staff, and Meta slashing 11,000 jobs. In fact, we see Amazon, down 40% year-over-year announcing it would reduce its workforce by approximately 11,000 jobs. Bezos told CNN, “Take some risk off the table. Just a little bit of risk reduction could make the difference.” Bezos added that it makes sense to keep some extra cash on hand which can benefit consumers as well as organizations alike when there is so much economic uncertainty.

For increasing numbers of Americans, the buying power is not cash, it’s credit. According to the Federal Reserve Bank of New York, credit card balances are the largest in more than 20 years, in the mid-November 2022 press release. “The Report shows an increase in total household debt in the third quarter of 2022, increasing by $351 billion (2.2%) to $16.5 trillion. Balances now stand $1.36 trillion higher than at the end of 2019, before the pandemic recession.”

But the wealthy have a completely different agenda. When wealthy people borrow money they aren’t in the habit of buying things that will only depreciate in value, because their agenda is to invest in things that they believe are more likely to increase in value. Astute investors understand the road to riches isn’t paved with debt, but debt can be an asset on taking positions that may appreciate. The road to riches is often paved with a higher purpose.

Elon Musk, the world’s richest man, pledged to provide $46.6 billion in equity and debt financing for his acquisition of Twitter. Musk, who Forbes says is worth around $220bn owned 9.6% of Twitter in market shares on October 28, 2022. Equity financing was secured thanks to a variety of sources, including bank loans, investors, and technology firms.

One of the ways highly affluent people finance investments or provide expensive gifts to their family is by borrowing from their own assets, instead of borrowing money from the bank. This concept can be especially beneficial when one would like to avoid selling profitable positions, only to pay income taxes on the gains at liquidation.

One of the ways to access cash is a securities-backed line of credit using non-retirement investment assets as collateral. Some savvy investors like to unlock the value of their portfolios without disrupting the investment strategy that has been strategically designed. This lending arrangement provides flexibility to access the value of your investments and can help manage cash flow without interrupting your financial plan. Your line of credit principal can be repaid at any time without penalty, as only interest is due monthly, provided the line remains in good standing. The loan proceeds may be applied toward business investment, real estate purchase, home renovation, tax payment, or bridge loan, for example. Thanks to fast processing, you can have access to funds quickly, with most loans taking three to five days to process. Your loan can be reviewed online where funds can be accessed, allowing for the transfer of money to linked accounts.

Borrowing to consume can be like throwing a boomerang at your own head. That bad debt practice can hurt. Good debt, however, can turn an enemy into your friend. I couldn’t agree more with Jeff Bezos. In the event the economy turns upside down, now is a good time to keep your borrowing powder dry. You want to be prepared for opportunities you cannot foresee. If, however, you manage debt well and you have an open window of opportunity today, you might like to weigh the advantages and disadvantages of borrowing from yourself, instead of the bank. You never have to worry about yourself becoming a judgment creditor. If however, you don’t manage debt well, you have to be very careful with available lines of credit. It’s far too easy to over extend and these lines of credit usually come with variable interest rates. Please consult your financial professional for all the possible options available to you.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. There is no “right” time to enter or exit a market. There is no guarantee that the investment objective mentioned here will be met. John Grace is a registered representative with and securities offered through LPL Financial, Member FINRA/SIPC

Pam Vetter

Pam Vetter

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