How to strategically use debt as a wealth-building tool

This illustrative example assumes a fixed 4% interest rate for one year and excludes fees, taxes, and other investment costs.

What is margin lending, and how does it work?

Margin lending allows you to borrow from a brokerage firm using investments in your account as collateral. You can use the money in your margin account to purchase additional securities or cover other expenses, depending on the brokerage’s rules.

Under Federal Reserve rules, investors can generally borrow up to 50% of the purchase price of eligible securities when buying on margin. Brokerage firms may impose stricter requirements.²

The biggest risk to margin lending is what’s called a “margin call,” which happens when your account’s equity falls below the required minimum.

For instance, say you have $100,000 of your own money and borrow another $50,000 to invest (creating a $150,000 portfolio). If its value falls to $70,000, you still owe $50,000. Your remaining equity is $20,000, or about 28.6% of the account’s value.

If your brokerage requires 30% maintenance equity, you’ve fallen below its threshold. As a result, you may need to deposit cash, add eligible securities, or sell investments. In some cases, your brokerage can sell securities on your behalf, which could force you to realize losses during a market downturn.²

What is a securities-backed line of credit, and how is it different from margin lending?

A securities-backed line of credit (SBLOC) allows you to borrow against eligible investments without selling them.³ High-net-worth investors sometimes use these loans to access cash while keeping their portfolios invested.

For example, someone with a $2 million portfolio might borrow $200,000 toward a vacation home rather than sell appreciated investments and potentially trigger capital gains taxes.

Both margin loans and SBLOCs use investments as collateral. But while margin loans can be used to buy additional investments, SBLOCs generally can’t.³

You also typically pay variable interest on the amount borrowed with an SBLOC. If your pledged investments decline, the lender may demand additional collateral or repayment. Depending on your agreement, it could sell securities to recover the loan balance.³

When does borrowing against investments make sense?

Using debt to build wealth is inherently risky, so always weigh the pros and cons. That said, borrowing could make sense if you need cash for a specific purpose, want to avoid selling long-term investments, and have a reliable repayment plan.

For example, a securities-backed loan might bridge the gap between purchasing a new property and receiving proceeds from selling another.

Before borrowing, ask yourself:

• What’s the true cost of borrowing? Compare interest, fees, and potential tax consequences with the cost of selling investments or using another financing option.
• How will I repay this debt? And better yet: How likely am I to be able to repay this debt as intended? (Example: Expected proceeds from selling property could be more reliable than hoping investments appreciate.)
• Can I withstand a downturn if one happens? Make sure you have enough cash or other liquid assets to handle a collateral call without jeopardizing your financial goals.

What happens when using debt as a wealth-building tool goes wrong?

When leverage goes wrong, you could lose more than your original investment, face unexpected repayment demands, or be forced to sell assets at a loss.

Some of the biggest risks include:

• Borrowing too much. The more you borrow, the less room you have to absorb market losses before your lender could demand additional collateral.
• Concentrating your collateral. If most of your portfolio is tied to one company’s stock, a sharp decline could trigger a collateral call.
• Rising interest rates. If the rate on a $300,000 loan rises from 6% to 9%, your annual interest costs jump from $18,000 to $27,000.

Why insurance matters in a leveraged wealth-building strategy

When you're borrowing money to grow your wealth, you need a plan for protecting what you’ve already built.

Life insurance can help your family repay outstanding debt or avoid selling investments if you die unexpectedly. You can also use life insurance to build generational wealth.

Disability insurance can replace a portion of your income if a covered illness or injury prevents you from working, making it easier to keep up with loan payments.

For example, say you’re carrying a $300,000 loan while building your real estate portfolio. If you suddenly couldn’t work, would you have enough income to keep making payments? And if you died, would your family have to sell investments or property to pay off the debt? The right insurance coverage can help reduce those risks.

The cash value in a permanent life insurance policy may also provide another source of liquidity that isn’t directly tied to stock market performance. However, borrowing against a policy reduces its available cash value and death benefit until the loan is repaid. Outstanding loans can also have tax consequences if the policy lapses.

Frequently asked questions