LEVERAGE AS AN ALTERNATIVE TO SAVINGS

Imagine you have the ability to save $200 per month. After 12 months, if you earn a return of 6%, you will accumulate $2,467. Now, if instead, you borrow $60,000 at 4%, you will pay the same amount in interest as you were previously saving ($200 per month) but at the end of the year, assuming the same return, your investment return will be $60,000 times 6% = $3,600. And on top of this return, your interest is tax deductible, so your actual out of pocket cost is less than $200 per month, depending on what your marginal tax rate is (or MTR, which is the tax rate on the last dollar earned or first dollar deducted – Click here for tax calculator . If you want to play with various scenarios, check out Talbot Stevens' website at www.talbotstevens.com where you can download software that illustrates various leverage scenarios.

The risks of pursuing this strategy are the same as in the Smith Manoeuvre below except you would not have distribution risk.