The most common case is your mortgage. Let's say you can borrow at 4% interest rate from the bank for your mortgage and you can have 5% return on your stock investment, you basically make 1% net gain on every dollar you borrow from the bank. In this case, you should borrow as much as possible from the bank.
There are two key things to make this work
- First, the risk associated with this is the % of return you can get from your stock investment. If your return is below the interest rate, you are losing money. In previous section, we talked about how to invest. After more practice, you can get comfortable with it;
- Second, you want as low interest rate from the bank as possible, which will minimize your risk and maximize your return. The key for this is your credit score, which measures your credit worth. The higher the score, the lower the interest rate you can get.
The other case is to build your own company and get bandk load or venture capital funding. Building your own company is the best way to generate great return on your effort, since you get not only yourself but also many other people to make money for you. It is a much scalable model. When you first start, you need to build your prototype product on limited capital, may that be your own investment or a bank loan or other. This is where your credit score comes in. When your company grows larger, it is more about the company's performance, not your own, that matters to the financial world.
