Your portfolio can be the key to managing cash and maintaining flexibility.
Many of today’s financial gurus often say you should aggressively pay down debt and live without it. But you’ve also probably heard that it takes money to make money.
And if you have the means and the know-how to grow it, then borrowing can be a sound financial strategy.
Why wealthy investors borrow
Certain lending solutions can allow you to keep your assets invested, and potentially growing, while providing access to liquidity. That’s particularly important because time in the market can be a key to long-term portfolio growth and success.
A line of credit is often an inexpensive way to get cash when you need it. It can also enable executives to monetize stock ownership without incurring capital gains or reducing ownership in their company.
As long as the cost of borrowing is lower than the amount you’re earning by borrowing it, then it can help you continue to build wealth.
Using debt to lower taxes
Debt can be used as a savvy tax strategy, particularly if your income comes in nontraditional forms, such as shares in a company you founded. That’s because interest on a loan may be lower than what you might pay in capital gains taxes from selling shares. By borrowing against your shares, you can continue enjoying your lifestyle without liquidating wealth.
You can also borrow to fund tax-advantaged assets like real estate. Since mortgage debt interest is tax deductible up to a certain amount, the savings in taxes on a significant mortgage could be larger than the mortgage interest.
Even in a higher interest rate environment, the cost of borrowing can be lower than the cost of selling an asset when you have collateral.
Three types of collateralized debt
Asset-backed loans can provide access to liquidity while enabling the underlying asset to continue growing. If this sounds enticing, consider the following options:
Securities based lines of credit – Leverage your existing assets as collateral to access capital quickly, at a relatively low interest rate and without disrupting your asset allocation.1
Pledged asset mortgage – You can finance up to 100% of the purchase price of your home using eligible securities as collateral in lieu of a down payment or equity position, helping you keep securities invested and avoiding potential capital gains taxes.2
Tailored lending – A customized credit solution gives you access to liquidity by leveraging illiquid assets that are otherwise difficult to value or sell.1
A special wrench for your financial toolbox
Figuring out when it’s best to strategically borrow or when to just pay cash can be a complicated question. Your financial advisor has access to tools that can help your money work for you, including giving it a second job through a collateralized loan.
This is for informational purposes and is not intended to be tax advice. Please consult with a tax advisor for specific questions regarding qualified expenses.
Past performance is not indicative of future results. There is no assurance any investment strategy will be successful. Investing involves risk including the possible loss of capital.
1 A line of credit , such as a securities-based line of credit or a structured line of credit, may not be suitable for all clients. Borrowing on securities-based lending products and using securities as collateral may involve a high degree of risk, including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the pledged account(s) may be sold to meet the collateral call, and the lender can sell the client's securities without contacting them.
2 A Pledged asset mortgage program is not suitable for everyone. A loan client may be at risk of losing money in their collateral account due to market volatility. This may require the deposit of additional equity into the collateral account, which could result in further losses.
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