A WEALTH OF KNOWLEDGE ARCHIVES

Invest School Loan?

October 16th, 2008, byMichelle Singletary

Q: I am 42 years old and planning to move to California in August 2010. I want to open several businesses that will benefit those residing near the businesses. Currently, I work at an eatery, and I don’t make much money. In January, I will get loan money to go to school for online classes. I am interested in investing some of the money each semester. Is this a good idea? I want the funds that I get to grow. I want to use some of the invested funds to purchase a building in Los Angeles. I want to house the businesses in the building, along with my personal residence. I want to also use some of the investment money to begin paying on my loans. I do want to eventually invest long term.

A: I want to say this first, so it doesn’t get lost in the rest of what I recommend in answering your question.

You should NEVER (and I capitalize the word “never”) invest with borrowed money. You definitely shouldn’t be investing with money you are receiving to pay for college courses. If you invest with borrowed money, you’re not an investor; you’re a gambler.

If there is one lesson to take away from the current economic crisis—and there are many to be had—it should be the dangers of investing with borrowed funds. It’s that practice that has brought down major corporations.

Why is investing the loan money a bad idea?

Well, you would be investing in a down market, with great risk of losing money you can’t afford to lose. Generally, you would not invest funds you need in less than five years. So, in case I’m not clear, you absolutely should not invest loan money for school.

As for starting a business and buying property in Los Angeles, if you don’t have a good down payment—anywhere these days from 5% to 20%—and stellar credit, you will find it nearly impossible to borrow, especially for an investment property, let alone for a primary residence.

It’s wonderful you want to become an entrepreneur, but you need far more in savings. You need to narrow down what business you want to run. I would suggest you start with just one business. You need to do a lot more research. You need a solid business plan.

It’s good to dream big, but that dream will be a huge nightmare if you don’t have a good plan.

Finally, I love that you want to invest long term. Despite the turbulent times in the stock market, long term, you stand a good chance to earn a good return on your money. So, once you have saved some funds that you don’t need, certainly begin to invest. If you join a company with a good 401(k) or similar workplace retirement plan, sign up and begin to save for your future. But right now, you need to concentrate on savings and possibly avoiding taking on any debt, even to go to school.

Last modified: April 18, 2011 at 2:54 pm