Why not to invest your Home Equity
In the past few years, hundreds of people have invested home equity, only to lose it all and get into serious financial trouble. With this in mind, here are a few reasons why you should not invest your home equity. Avoiding these five pitfalls will prepare you to safely maximize the productivity of all your financial resources, including home equity.
If you’re going to use any of your home equity to purchase items of personal consumption, do not touch it. This is the single most prevalent and damaging pitfall with this strategy. Consumption is anything you spend money on that does not directly return money to you, such as clothes, food, vacations, jewelry, cars, boats, etc.
Consumption must be sustained by production, which means creating value for others in such a way that value is returned to you. When your consumption exceeds your production, the only logical outcome is insolvency and eventual bankruptcy.
The Solution: The wealthy never use their assets to consume–they only consume the profits generated by their assets. Only access home equity to produce and invest in things that will generate returns. Your home equity is your golden goose. Don’t kill it by consuming it–use it wisely to enjoy the golden eggs it can produce.
Lack of Knowledge & Chasing High Returns
With home appreciation rising in double-digits, banks giving loans liberally, and people having access to investments promising high returns, the exuberance of many so-called investors in the past few years has only been exceeded by their ignorance.
People were putting money into investments that they knew very little about, they had no idea where the money went, they had no idea how to control the investment, and were doing so simply because they were receiving high returns. That is until it all came crashing down.
The Solution: If you don’t know where your money is going, what it’s doing, how it’s creating value, what your exit strategy will be, what the tax consequences are, and how you can recover if it’s lost, don’t do it. Also, if your primary reason for wanting to invest in something is to make money, don’t do it. Only invest in things that reflect your knowledge, abilities, expertise, and passions.
For information on asset management contact Nigel Walter chairman of Connaught AM
