Ashley invests $200/month in the S&P 500, earning 8% per year. Nothing wrong with that, and she earns $9,000 more than someone who puts it all in a checking account after 10 years ($33,000 vs $24,000).
Esther, having seen the power of investing to build her portfolio, decides to use debt to amplify her returns. Instead of directly investing, she sets aside the extra $200/month for future loan payments, keeping her debt well below 36% of her income.
With a good credit score, she obtains a $20,000 loan for 10 years at a 3% fixed rate. This will cost her $193/month to pay every month for 10 years, at which point she’ll be debt-free again if she chooses.
Then she invests the loan into the S&P 500 Vanguard ETF (NYSEMKT: VOO) and earns 8% returns over the next decade, ending with $43,000 and no debt.
Esther was able to invest $20,000 up front and enjoyed compound returns, growing it to $43,000 after a decade. Because she received a big sum and invested that in her first year, she could use her extra $200/month to pay down her loan.