Borrowing money and then investing it — smart or nart?
The biggest concern is how you get $250,000 in unsecured credit. It's unlikely that you will be loaned that amount at a percentage lower than what you expect to earn. Unsecured credit lines are rarely lower than 10% and usually approach 20%. On top of that, for a bank to approve you for that credit line, you have to have a high credit score and an income to support the payments on that credit line. But lets suspend disbelief and assume that you can get the money you want on loan. You would then be expected to pay back that 10%, but investments don't go up uniformly. Some years they go up 15-20% and other years they go down 10%. What do you do if you have to sell some of your investments in a down year? That money is no longer invested, and you can't recover it with the following up year because you had to take too much out to cover the loan payments. You'll be out of money long before the loan is repaid because you can expect there will be bad years in the stock market that will eat away at your investment. There were a lot of people who took their money out of the market after the crash of 2008. If they had left their money in through 2009, they would have made all that money back, but if you have a loan to pay you have to pull money out in the bad years as well as the good years. Unless you have a lucky streak of all good years, you're doomed. I will use 10% of this 20K to pay the loan back on an annual basis agreement An annual payment of 0.8% ($2,000 / $250,000) is nowhere near large enough.  The interest alone is going to be well over $10,000 (and probably closer to $20,000 on an unsecured loan), so you need to plan for at least a $20,000 - $30,000 annual payment, depending on the terms (length and interest rate) on the loan.   But in general... is this sustainable/safe?  Essentially what you are doing is using leverage to increase the amount you can invest.  While this is fantastic when the market rises, it can go horribly wrong when the market goes down.  Generally it is unwise to fund a risky (meaning there are large swings in return) investment with a risk-free (meaning you'll always make a payment) loan. If you want to see what could happen, forecast a 20% market drop and see what you are left with (obviously you'll need to make the loan payment out of your balance since you won't have any gains to pull from).  An average of 10-12% over a long period of time is reasonable, but the variance can cause the return to be anywhere from -40% to +40% in one year.  Can you afford those losses?   Here's an actual example: If you were to invest $250,000 in the S&P 500 in January 2000 with an 8% interest-only loan, your next three years' returns would be: After three years, assuming an interest-only payment of $20,000, your balance would be just over $100,000, you'd still owe $250,000, and you'd still be making $20,000 in interest payments.  If your loan interest rate was 25% (which is not unreasonable for an unsecured loan), you'd be bankrupt after 3 years - you'd still owe $250K but could not make the interest payment. No, this is not a good idea.  The only time you should borrow money to invest in when you have control over the returns.  So if you wanted to start your own business, had a stable business plan, and had much more certainty over the returns, the borrowing money might be plausible.   But borrowing money to do passive investment is a huge mistake. "Theory of Levered Investing Borrowing in order to increase investment exposure is a time-honored and legitimate activity.  It's the optimal way to increase your exposure, according to finance theory (which assumes you get a good interest rate...more on this later).  In your case it may or may not be a good idea.  Based on the information in your post, I believe that in your case it is not a good idea.  Consider the following concerns. Risk In finance, reward comes with risk and in no other way.  Investing borrowed money means there is a good (not small) chance that you will lose enough money that you will need to pull significant wealth from your own savings in order to make up the difference.  If you are in a position to do this and OK with that possibility, then proceed to to the next concern.  If losing a lot of money means financial calamity for you, then this is a bad idea.  You haven't described your financial situation so I don't know in which camp you fall.  If the idea of losing, say, $100K means complete financial failure for you, then the strategy you have described simply has too much risk. Make no mistake, just because the market makes money on average does not mean it will make money, or as much money as you expect, over your horizon.  It may lose money, perhaps a lot of money. Make sure this idea is very clear in your mind before taking action. Rewards Your post implies that you think you can reliably get 10%-12% on an investment. This is not the case.  There are many years in which a reasonable portfolio makes this much or more, but on average you will earn less. No ones knows the true long-term market risk premium, but it is definitely less than 10%.  A better guess would be 6.5% plus whatever the risk-free rate is (currently about 0%).  Buying ""riskier"" investments means deviating from the optimal portfolio, meaning you took on more risk than is justified by how much extra money you expect to make.  I never encourage people to invest based on optimistic or unrealistic goals.  If anything, you should be conservative about how you expect things to go.  And remember, these are averages. Any portfolio that earns 10%-12% also has a very good chance of losing 25% or more.  People who sell or give advice on investments frequently get you charged up by pointing at times and investments that have done very well.  Unfortunately, we never know whether the investments and time period in which we are investing will be a good one, a bad one, or an unexciting one.  The reality of investing is...well, more realistic than what you have described. Costs I can't imagine how you could borrow that much money and only have an annual payment of $2000 as you imply--that must be a mistake.  No individual borrows at a rate significantly below 1%.  It sounds like it's not a collateralized loan of any kind, so unless you are some kind of prime-loan customer, your interest rate will be significant.  Subtract whatever rate you actually pay from 6.5% to get a rough idea of how much you will make if things go as well as they do on average.  You will pay the interest whether times are good or bad. If your rate is typical of noncollateralized personal loans, there's a good chance you will lose money on average using the strategy you have described.  If you are OK with taking risk with a negative expected return, consider a trip to Las Vegas.  It's more exciting. Ethics I'm not one to make people feel guilty for doing things that are legal but of questionable morality.  If that's the case and you are OK with it, more power to you. I'm not sure under what pretense you expect to obtain the money, but it sounds like you might be crossing legal lines and committing actual crimes (like fraud).  Make sure to check on whether what you intend is a white lie or something that can get you thrown in prison. For example, if you are proposing obtaining a subsidized education loan and using it for speculation, I could easily see you spending serious time in prison and permanently ruining your life, even if your plan works out.  A judge and 12 of your peers are not going to think welfare fraud is a harmless twist of the truth. Summary I've said a lot of negative things here.  This is because I have to guess about your financial situation and it sounds like you may have unrealistic expectations of the safety and generosity of investing.  Quite frankly, people for whom borrowing $250K is no big deal don't normally come and ask about it on StackExchange and they definitely don't tend to lie in order to get loans.  Also $18K a year doesn't change their quality of life. However, I don't know.  If $250K is small relative to your wealth and you need a good way to increase your exposure to the market risk premium, then borrowing and investing may well be a good idea." There are two fundamental flaws to your plan: Supposing that you can get a loan with an interest rate that is less than the profit you are likely to get from an investment. Historically, the U.S. stock market goes up by 6 to 7% per year. I just did a quick check and found rates for unsecured loans of 10 to 15%. Of course interest rates vary depending on your credit rating and all sorts of other factors, but that's probably a reasonable ball park. Borrowing money at 15% so you can invest it at 6% is not a good plan. Of course you could invest in things that promise higher returns, but such investments have higher risks. If there was a super safe investment that was virtually guaranteed to give 20% profit, the bank wouldn't loan you money at 10 or 15%: they'd put their money in this 20% investment. I don't know what your income is, but unless it's substantial, no one is going to give you an unsecured loan for $250,000.  In your question you say you'll use $2,000 of your profits to make payments on the loan. That's less than 0.8% of the loan amount. If you really know a bank that will loan money at 0.8%, I'm sure we'd all like to hear about it. That would be an awesome rate for a fully secured loan, never mind for a signature loan. $250,000 for 10 years at 10% would mean payments of $3,300 per MONTH, and that's about the most optimistic terms I can imagine for a signature loan. You say you plan to lie to the bank. What are you going to tell them? A person doesn't get to be a bank loan officer with authority to make $250,000 loans if he's a complete idiot. They're going to want to know what you intend to do with the money and how you plan to pay it back. If you're making a million dollars a year, sure, they'll probably loan you that kind of money. But if you were making a million dollars a year I doubt you'd be considering this scheme. As TripeHound said in the comments, if it was really possible to get bigger returns on an investment than you would have to pay in interest on an unsecured loan, then everybody would be doing it all the time. Sorry, if you want to be rich, the realistic choices are, (a) arrange to be born to rich parents; (b) win the lottery; (c) get a good job and work hard. It's incredibly foolish because it fails to use the investments as collateral to secure the loan. So instead of paying 5% or less for a loan secured by liquid assets, you'll be paying 10% or more for an unsecured loan. I do leveraged investments all the time and make a reasonable amount of money doing it (at high risk, I concede). I always use the investment to secure the loan and, as a result, pay a very low interest rate (since the lender can sell of my investments if I fail to repay the loan, reducing their risk dramatically). An unsecured loan would cost several times more.
To supplement Ben's answer: Following 'smart money' utilizes information available in a transparent marketplace to track the holdings of professionals.  One way may be to learn as much as possible about fund directors and monitor the firms holdings closely via prospectus. I believe certain exchanges provide transaction data by brokers, so it may be possible for a well-informed individual to monitor changes in a firms' holdings in between prospectus updates.  An example of a play on 'smart money':  S&P500 companies are reviewed for weighting and the list changes when companies are dropped or added. As you know there are ETFs and funds that reflect the holdings of the SP500.  Changes to the list trigger  'binary events' where funds open or close a position. Some people try to anticipate the movements of the SP500 before 'smart money' adjusts their positions. I have heard some people define smart money as people who get paid whether their decisions are right or wrong, which in my opinion, best captures the term. This Udemy course may be of interest: https://www.udemy.com/tools-for-trading-investing/ As a 22 year old planning for your financial life, it is obvious to say that saving as much as you can to invest for the long run is the smartest thing to do from a financial point of view.  In general, at this point, aged 22, you can take as much risk as you'll ever will. You're investing for the very long term (+30/+40 years). The downside of risk, the level of uncertainty on returns (positive or negative), is most significant on the short term (<5years). While the upside of risk, assuming you can expect higher returns the more risk you take, are most significant on the long term.  In short: for you're financial life, it's smart to save as much as you can and invest these savings with a lot of risk.  So, what is smart to invest in? The most important rule is to keep your investment costs as low as possible. Risk and returns are strongly related, however investment costs lower the returns, while you keep the risk. Be aware of the investment industry marketing fancy investment products. Most of them leave you with higher costs and lower returns. Research strongly suggests that an lowcost etf portfolio is our best choice. Personally, i disregard this new smart beta hype as a marketing effort from the financial industry. They charge more investment costs (that's a certain) and promise better returns because they are geniuses (hmmm...). No thanks. As suggested in other comments, I would go for an low cost (you shouldn't pay more than 0.2% per year) etf portfolio with a global diversification, with at least 90% in stocks. Actually that is what I've been doing for three years now (I'm 27 years old). "No one can really answer this for you.  It is a matter of personal preference and the details of your situation.  There are some really smart people on here, when placed in your exact situation, would do completely different things.  Personal finance is overall, personal. If it was me, I'd never borrow money in retirement.  If I had the cash, I'd use it to help fund the purchase.  If I didn't, I simply wouldn't.  For me wealth retention (in your case) is surprisingly more about behavior than math (even though I am a math guy).  You are simply creating a great deal of risk at a season in your life with a diminished ability to recover from negative events.  In my opinion you are inviting ""tales of woe"" to be part of your future if you borrow. Others would disagree with me.  They would point to the math and show how you would be much better off on borrowing instead of pulling out of investments provided a sufficient return on your nest egg.  They may even have a case as you might have to pay taxes on money pulled out magnifying the difference in net income on borrowing versus pulling out in a lump sum.  Here in the US, the money you pulled out would be taxed at the highest marginal rate.  To help with a down payment of 50K, you might have to pull out 66,500 to pay the taxes and have enough for the down payment. The third option is to not help with a down payment or to help them in a different way.  Perhaps giving them a few hundred per month for two years to help with their mortgage payment.  Maybe watch their kids some to reduce day care costs or help with home improvements so they can buy a lower price home.  Those are all viable options.  Perhaps the child is not ready to buy a home. Having said all that it really depends on your situation.  Say your sitting on 5 million in investments, your pensions is sufficient to have some disposable income, and they are asking for a relatively small amount.  Then pull the money out and don't be concerned.  You nest egg will quickly recover the money." Your hypothetical money market account parallel basically nails it.  You understand exactly how the math works.  IRR computes a rate at which your money market account would have to pay interest in order to match whatever investment you are comparing to. That said, there are two major complicating factors to consider: Your hypothetical account would have to not only pay interest, but also lend money, at exactly the IRR rate.  In reality of course, it never happens this way.  You may be able to lend (invest) at x, but to borrow you're going to have to pay y.  IRR simplifies away that issue in order to give us a single number.  That number can be very handy for comparison to other competing hypothetical investments, but it does not capture that fundamental issue of lending rate vs. borrowing rate. An IRR calculation assumes implicitly that all cash flows, outgoing and incoming, are known and fixed; that is, risk-free.  It makes no allowance whatever for risk, and all investments have some level of risk.  Two investments that compute to the same IRR might have hugely different risk around their cashflows, and so not be a close decision at all.  To compare those investments, you might go to a measure like RAROC-- risk-adjusted return on capital.  But that's much harder, and more subjective, because it requires some numerical measurement of risk. The typical deal is you can put 10% of your gross pay into the ESPP. The purchase will occur on the last deposit date, usually a 6 month period, at a 15% discount to the market price.  So, the math is something like this: Your return if sold the day it's purchased is not 15%, it's 100/85 or 17.6%. Minor nitpick on my part, I suppose.  Also the return is not a 6 month return, as the weekly or bi-weekly deductions are the average between the oldest (6 mo) and the most recent (uh, zero time, maybe a week.) This is closer to 3 months. The annualized rate is actually pretty meaningless since you don't have 4 opportunities to achieve this return, it's important only if the cash flow hit causes you to borrow to support the ESPP purchases. The risk is whether the stock drops the 15% before you can execute the sell to take advantage of the gain.  Of course the return is gross, you need to net for taxes.  Edit to respond to comment below - When I said meaningless, I meant that you can't take the 17.6%, annualize it to 91.2% per year and think your $1000 will compound to $1912. It's as meaningless as when an investor gets a 10% gain on a stock in one day, and (with 250 trading days per year) decides his $1000 will be worth $2 quadrillion dollars after a year. The 17.6% is significant in that it's available twice per year, for a true 38% return over a year, but if borrowing to help the cash flow, that rate is really over 3 months. 3 years ago I wrote Student Loans and Your First Mortgage in response to this exact question by a fellow blogger in my state.  What I focused on was the way banks qualify you for a loan, a percentage for the housing cost, and a higher number that also comprises all other debt. If the goal is speed-to-purchase, you make minimum payments on the student loan, and save for the $100K downpayment as fast as you can.  The question back to you is whether the purchase is your priority, and how debt averse you are. I'd caution, if you work for a company with a matched 401(k), I'd still deposit to the match, but no more.  Personal finance is just that, personal. We don't know your entire situation, your current rental expenses vs your total condo cost when you buy. If you are in a location where renting costs far more than your cost of ownership, Ben might change his mind a bit. If the reverse is true, you're living a college student's lifestyle with a room costing $400/mo sharing a house with friends, I'll back off and say to pay the loan and save until you can't tolerate the situation. You'll find there are few situations that have a perfect answer without having all the details. I agree with the advice given, but I'll add another angle from which to look at it. It sounds like you are already viewing the money used to either pay off the loan early or invest in the market as an investment, which is great. You are wise to think about opportunity cost, but like others pointed out, you are overlooking the risk factor. The way I would look at this is: I could take a guaranteed 6.4% return by paying off the loan or a possible 7% return by investing the money.  If the risk pays off modestly, all you've done is earned 0.6%, with a huge debt still hanging over you. Personally, I would take the guaranteed 6.4% return by paying off the debt, then invest in the stock market. Now this is looking at the investment as a single, atomic pool of money.  But you can split it up a bit.  Let's say the amount of extra disposable income you want to invest with is $1,000/mo.  Then you could pay an extra $500/mo to your student loan and invest the other $500 in  the stock market, or do a 400/600 split, or whatever suits your risk tolerance. You mentioned multiple loans and 6.4% is the highest loan.  What I would do, based on what I value personally, is put every extra penny into paying off the 6.4% loan because that is high.  Once that is done, if the next loan is 4% of less, then split my income between paying extra to it and investing in the market. Remember, with each loan you pay off, the monthly income that previously went to it is now available, and can be used for the next loan or the other goals. My figuring (and I'm not an expert here, but I think this is basic math) is: Let's say you had a windfall of $1000 extra dollars today that you could either: a. Use to pay down your mortgage b. Put into some kind of equity mutual fund Maybe you have 20 years left on your mortgage.  So your return on investment with choice A is whatever your mortgage interest rate is, compounded monthly or daily.  Interest rates are low now, but who knows what they'll be in the future.  On the other hand, you should get more return out of an equity mutual fund investment, so I'd say B is your better choice, except: But that's also the other reason why I favour B over A.  Let's say you lose your job a year from now.  Your bank won't be too lenient with you paying your mortgage, even if you paid it off quicker than originally agreed.  But if that money is in mutual funds, you have access to it, and it buys you time when you really need it.  People might say that you can always get a second mortgage to get the equity out of it, but try getting a second mortgage when you've just lost your job.