Should I take on more debt? That is a great question! If you’re asking yourself this, it means your head is in the right place. There are many people who have “extra” cash, and then decide that they can afford the monthly payment for an expensive item. 

In the quest for early retirement, you can’t afford to look at money that way! All of the “extra” money coming in should be allocated towards building an emergency fund, paying off debt, saving up for an asset, or buying investments. 

So should I not take on any debt? Unless you are already very wealthy or are have a very high income, the answer is no. It will simply take you too long to acquire the assets needed to retire early without either a high income or already existing wealth. 

Debt, which is really just a form of Financial leverage, is one of the best and fastest ways to become financially free. Real estate allows you to use leverage debt to retire early. And this is one of the reasons why we love it so much! Where else can you put down $5-20,000 and control a $100,000 asset?

Debt is a double edged sword

It’s a bit confusing right?! On one hand, debt is a terrible burden which prevents you from ever reaching financial independence. On the other hand, it is all but necessary to accomplish your financial dreams. 

So how do you know which path to take? And furthermore, what in the hell is going on here?

Debt is a form of leverage, and that means that it amplifies the effect of your Financial Decisions. It won’t suddenly turn a bad decision into a good one and vice versa. 

Isn’t all debt bad

Debt is a tool which is neither good nor bad. As we just discussed, it is simply a tool that amplifies the results of your financial decisions. Therefore bad decisions become really bad decisions. Many poor people have a negative outlook on debt. But really this is simply a reflection of their poor decisions. 

The poor make bad financial decisions and they amplify the fallout with the use of debt. Then they correctly surmise that debt has trapped them into their financial decisions. 

The wealthy learn how to use this powerful tool to increase their great financial decisions. Rather than fear debt, they learn how to wield it to increase their wealth. Which is why many wealthy people are also the most indebted people. 

So, should I take on more debt?

Finally, we get to the answer. First, can you comfortably make the monthly payments for the forseeable future? If you can easily make the payments, and don’t imagine that this will change any time soon, continue to the next question. If you can’t afford the payments, or are planning a sudden change in income absolutely do not take on more debt. 

Second, will this debt bring in more money than it costs? If yes, then you have the green light to take on the additional debt. If not, then you should not take on the additional debt. 

A great example of this is student loans. Let’s say you take out 30,000 in loans at 5% for your college education. You will have a loan payment of approximately $300/month or $3,600/year. If you can get a job for $30,000/yr with a highschool degree, and a job for $60,000/yr with a college degree the debt makes sense. You’re paying 5% to get a 100% return every year. You spent 30k to receive 30k per year. 

If you go to an expensive private school that costs $150,000 @ 5% for a college degree, and you get a job that pays $40,000 this is not worth it.  Now you’re paying $1,500/month or $18,000/year in order to make an additional $10,000. That is a negative 80% return. 

Summary

In order to scale your wealth quickly outside of a business, you’ll need to take on debt to accelerate your returns. Use debt to buy assets. As long as the asset returns more to you than the debt costs you’ll be in good shape financially. 

The post Should I Take On More Debt? appeared first on FiBy30.