I’ve come to the realization that I have 2 clear financial goals: Financial Independence and Wealth Accumulation. These 2 goals, at times, contradict each other and at others overlap. First I would like to lay out the goals of each as I apply them in my life:
Goals of Financial Independence:
- To not have any debt, period.
- Car loans, home loans, student loans, credit car debt, etc. should be avoided when possible and paid off in the fastest plausible scenario imaginable.
- Pay yourself first and save for future quality of life/retirement.
Goals of Wealth Accumulation
- Leveraging investments with debt. I.E. business loans, home loans, student loans.
- Creating revenue streams through your investments.
- Pay yourself first and save for future quality of life/retirement.
As you can infer from the graphic above I believe there is a financial sweet spot in managing both of my goals.
First, I understand that by carrying too much debt I will never be able to accumulate any real wealth. Working a full time job and paying down my mortgage and miscellaneous debt is fine, but it will take me about 10-15 more years if I really tighten my belt. In the mean time I will be passing up opportunities in life having to work for “the man” just to achieve financial independence.
Second, if I want to start a business or get into real estate investing (like I want to do) then there is not enough time left in my lifetime to save for all the costs upfront. Saving say 20% of the upfront cost for a down payment is reasonable while leveraging the rest of the investment with a loan is an acceptable financial risk worth the future wealth reward for me and my family.
As a final thought I will actively try to prevent holding any debt that exceeds the returns on my investments. For example I expect my stock market investments to meet (not beat) the S&P 500 index returns. The expected annual return on that investment is 6%. That means I will never have any outstanding loan that exceeds that 6% threshold if it can be avoided, I do not want to be pulled away from financial independence for the sake of wealth accumulation.
Great post š
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Great post. We all endure the Wealth accumulation phase so that we can get to FI and the golden wealth preservation stage, but it takes time and risks. Time in the form of working for the man and risks in the form of student loans to increase on earring potential, money spent to learn new side hustles, real-estate investing debt and debt to start a business. Even if you live on 10% of your income and invest 90% in index funds, there is still the risk of a market crash, but the real risk is if we have the right mindset and fortitude to continue to invest into the crash.
I too am trying to get into Realestate investing, but still trying to aggressively pay down student loan debt as well. One will lead to increase earring potential and other will allow me to be closer to FI. It’s the classic age old question. Invest or pay down debt. Where’s the sweet spot? Debt is currently at 4.5% interest rate. Based on my deal check app the real-estate investments I’m looking at has a cap rate of 9.7%, cash on cash return of 108% and ROI of -48% and ROE of 72.9%. Cash flow is $164 a month.
What are your thoughts.
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Sorry I’ve been off the grid for the last week. I’m sure we can find a couple rules of thumb about debt to equity ratios but I think it really boils down to how comfortable you with the amount of debt you have. David Ramsey would probably say pay down all your outstanding loans before leveraging into real estate investing. On the other hand Robert Kiyosaki would advise you to make money using someone else (the banks) money. That sweet spot has to take in factors like how much you make, job security, savings, and risk acceptance.
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This is something I have thought about a lot and my plan (as of right now) is to invest for cash flow, mainly through real estate, until my expenses are covered. After that I plan to pay down equity and make other financial moves to grow my wealth even more
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Btw I thoroughly enjoy reading your blog. Fantastic content!
I have recently created a new Investment Blog (theinvestorworld.com) and I am trying to build up my followers.
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This is a dilemma that our company has. Increase leverage to increase income and cash flow or debt reduction. Over the past few years we’ve been enjoying these historically low interest rates and using debt to increase our income. We mostly invest in income producing real estate.
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thank you for this great post. i struggle with trying to pay off the mortgage and build wealth.
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in my mind, inflation makes a long mortgage a pretty good debt if you secured it for a long fixed term. No real need to pay it off too early as it will start paying for itself as time passes and you increase your earnings to match inflation etc.
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