I Never Want to Be Debt Free

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I Never Want to be Debt Free

All over the internet people are touting the importance of being debt free.

Debt is bad!

All debt will ruin your life!

Debt is the number one reason for divorce.

Yadda Yadda YADDA!

…don’t get me wrong, debt certainly can be all of those things.

However, if used correctly, there are some great advantages to utilizing debt in your life!

Investments > Low-Interest Debt

The first advantage of debt is that low-interest debt doesn’t cost very much.

At a 4% interest rate, it costs only $40/year for every $1,000 you borrow.

For this reason, I would usually prefer to buy a car with a low-interest auto loan, than to pay for it in cash. I can easily invest $10,000 for a higher return on investment than the auto loan will cost me.

If I were to buy the car in cash, I would essentially be earning a return equal to what the low-interest debt would have cost me.

Once the car is paid off, the loan disappears.

At that time, I will still own the investment I purchased with my $10,000.

The bottom line is this if the interest rate on your debt is higher than the return on investment would be from investing, pay the debt off first.

If the return on investment is higher than the interest rate on your debt, don’t let the debt bother you.

If they are pretty similar rates, do whatever makes you feel the most comfortable.

At the end of the day, a warm and fuzzy about your finances is always good to have!

Leverage

The magic of real estate investing is the use of leveraging a bank’s money, for your benefit.

Leverage allows you to turn $20,000 into the ownership of a $100,000 property.

The problem some people have with leverage is that it’s debt.

I consider leverage to be good debt.

Good debt is any debt that helps me build wealth, and earn money.

For example, if I take on a large amount of debt to purchase an apartment complex, but that apartment makes me money after all expenses are paid, it is 100% worth taking on the debt.

If you are risk-averse, and only purchase real estate in cash, it will take you much longer to build a portfolio of real estate.

Another benefit to leveraging debt for real estate investing is that the interest paid on your mortgage is a tax deduction. This helps write off more of the income received from your property, while STILL receiving the cash flow, and having tenants pay for your debt!

Asset Protection

I am currently embroiled in a lawsuit.

I did not want to sue, but life happens, and sometimes it is the only solution to a problem.

Upon filing the lawsuit my opponent added m personally to the lawsuit. Scary right?

Not really.

All of my assets are owned by limited liability companies (LLC’s), which protects them from a personal lawsuit against my person.

All I own with my name is two cars, and a primary residence.

Both of my cars currently have liens against them, and my primary residence is highly leveraged between the mortgage and a HELOC.

Because of this, it makes no sense for the other party to go after me personally because, on paper, I’m not worth anything.

The court could force the sale of my property in order to pay the other party if I owned these assets free and clear.

I like knowing that my asset is cash flow positive, tenants are paying my loan down, AND providing me additional asset protection!

High-Interest Debt

Now, is all debt good?

Absolutely not!

I’ll admit, the title of this article is a little misleading. While it isn’t a lie, it certainly isn’t the full truth, either.

I do intend to be free of all high-interest (bad) debt in life.

If the interest rate on my debt is higher than I can earn through investing, I will absolutely pay it off ASAP. If the debt is hurting my credit score (I.e. over-utilization of credit cards) I will pay it down quickly.

The bottom line is this, debt is dangerous. If you’re going to play with fire, you need to wear all of the proper safety equipment and keep a water source nearby.

I will advocate for reasonable debt, and leveraging debt all day, every day. I will not, however, advocate for digging your financial grave by running amuck with your credit card.

Currently, I have more on my credit card than I would like due to a move, legal fees, and some other things that have come up. As such, I have re-allocated funds to pay this down ASAP so that I can continue building capital for my next investment.

I Never Want to Be Debt Free

Should You Strive To Be Debt Free?

Dave Ramsey has some great advice for getting out of debt, and I am a fan of the baby steps.

I would deviate from the baby steps once you’re free of bad debt.

Buying real estate with cash is safe, but it is very hard to scale. It also doesn’t provide quite as much asset protection as having a mortgage on the property does.

I hope this article helped change your attitude towards debt. Some debt is bad, and some debt is good.

Debt is nothing more than a tool for you to keep in your arsenal. Like any tool, it can be used to create something beautiful or to tear things down.

*WARNING* There is risk associated with debt, leverage, etc. Be careful not to overextend yourself, and always stay well within your comfort zone!

 

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David Pere

David Pere

David is an active duty Marine, who devotes his free time to teaching personal finance and real estate investing for service members, and the working class!

Leave a comment trooper!

3 Responses

  1. Great article. I think handling debt requires a large amount of discipline, and so does not borrowing a lot of debt. Question for you. How do you measure risk? Meaning when and how much you borrow?

    1. I generally just look at the worst-case scenario, and if it is survivable then I look at the possible upside, likelihood of each, and weigh them accordingly. If I’m comfortable with what could go wrong, then I’m all for the risk!

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