April 29, 2013, 6:26 am

Since When is Paying off Your Debts is a Good Thing?

by: The Financial Blogger    Category: Assets and Net Worth,Business,Leveraging Strategies
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I know the trend on financial blogs is to tell you to pay off your debts but what if this advice is wrong?

 

A rich person is an individual with no debts. I’ve often heard that quick line explaining that paying down your debts is the universal financial advice. Since the beginning of 2012, I’ve embarked on a quest against my debts. At the end of the year, I quit on paying debts and decided to turn back to what I do best: make money.

 

This doesn’t mean I’m not paying off my debts. In fact, my latest net worth statement shows that I’m now attacking my consumer debts with success. I’ve also mentioned on this blog that we are concentrating on paying off our corporate debts at a fast pace recently. Over the past 12 months, we have paid down about 30K of our corporate debts and we should pay another 20K this year to finish paying off our debts towards the end of 2014.

 

Quick accounting tip: you are better off paying your corporate debts over a few years since you need to use after tax money to pay it. Therefore, if you pay everything in 1 year, you will have a big fat check to write to the tax guy!

 

My partner was quite happy to see my perception of debts changing over the years. After all, I was the one who mortgaged his house to buy our first site 4 years ago…

 

Why Leverage is The Best Way To Create Wealth

 

While most people like using a conservative approach regarding debt, I usually think that using others people money is the best way to make money. I’ve been thinking this way since I was a kid. I guess it’s in my genes. My life has been covered by leverage stories:

 

Back in high school, I was 12 when I first borrowed money (it was school money) from my friends to play dice. While it was a very bad idea to borrow money to gamble, I won a lot more money than I lost and was able to quickly reimburse my friend and run with my own money (and keep winning).

 

Back in College, I was thinking of applying for a student loan to invest in the stock market. Unfortunately (or fortunately), I was too lazy to fill in the paperwork in order to get the loan. Instead, I borrowed $5,000 on my credit card to buy a new car and fund enough cash to move into an apartment. Overall, it was an awesome move since I got a super nice deal in a great area of Montreal for cheap. My car was new and therefore I had never to go to a garage. Within 12 months, I cleared my credit card debt with my first day job.

 

Right after paying off my credit cards, I bought some land with a personal loan. I wanted to build my assets as fast as I could. Since I didn’t have many payments going on, I thought of borrowing 25K at a bank to buy a piece of land. I sold the land a year later with a profit of $4,000. That’s pretty nice considering I didn’t use my money!

 

Borrow to invest in the stock market. At the same moment, I wanted to start investing in the stock market. I was following several stocks daily and thought I could make a few dollars out of my new hobby. I borrowed 20K in 2003 and turned it into a profit of 50K in three years. This was the cash down payment for my house.

 

Borrow to buy the house of my dreams. I borrowed from my parents the amount of 25K a few years ago because I absolutely wanted to put 20% cash down on the house of my dreams. I knew I had to pay back the 25K (plus interest) after 5 years. But I also knew that my career was booming at the time and my income was set to be a lot larger 5 years later. I struggled a bit to pay them back on time, though I did it. In the meantime, I lived in an awesome house where I made a nice profit to buy my third house. I actually used a part of my profit to pay off my parents. This was definitely a great move. From a loan of 25K, I made a profit of $75,000 in four years.

 

Remortgage my house to buy a website. In 2009, I decided to borrow almost $30,000 using my house as collateral to inject into my online company. This transaction opened the door to many other deals and was definitely one of the pillar moments for our business. Since this purchase, we have been making over $100,000 in annual gross income. I took about 23 minutes to decide to buy the site or not and to remortgage my house. In fact, 3 minutes was for thinking about it and 20 minutes was to explain to my wife why she had to sign all the paperwork ;-).

 

SO WHY AM I DELEVERAGING TODAY???

 

After all these great stories about leveraging, I can say that borrowing money is definitely a good idea. I would not be worth 250K at the age of 31 while affording to have a stay-at-home wife + three kids without my leveraging abilities.

 

However, it’s been over a year that I’m focusing on debt repayment. My goal in 2013 is to drop under $300,000 of debts and would like to clear all my consumer debts other than my mortgage by the end of 2015. Our online company went up to nearly $100,000 in corporate debts last year and we are now down under $70,000 and counting.

 

Both my personal and corporate finances have been growing year after year due to several leverage maneuvers. Nonetheless, I’m taking the decision to clear my debts in the upcoming years. By the end of 2015, I should only have a mortgage over my head and my company will be free of debts. Can you see me coming with this?

 

That’s right: I’m preparing for financial freedom. In two and a half years, I’ll be 34. By the age of 35, I wish to be financially free. This doesn’t mean that I won’t have any debts but if I can clear everything and have just a mortgage to take care of; I can basically live from any kind of income and still be able to make it.

 

While leveraging has been the only solution to generate income over the past 10 years in my life, it’s time to clean my balance sheet in order to move forward a lot faster. You know I’ll start borrowing again at the age of 35 to grow my income & assets to a whole new level. I’m just preparing my balance sheet for another big jump in two years…

 

What about you? Have you ever borrowed money to accelerate your asset building?

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Comments

I think borrowing money to grow your assets comes with it’s own risk. You were really smart and lucky to be able to do this successfully. I know a lot of people who don’t and end up with lots of debt.

Wow! Sounds like you were successful, but I think that sounds pretty risky. Money is valuable and it is nice to own your own home and live a luxurious lifestyle, but I don’t think I would ever borrow to gain because you never know what will happen.

I used mortgages to accumulate income property. It is the ultimate in leverage! I built it into a business and did very well. I believe rich people understand this concept and apply it to everything they do.

by: The Financial Blogger | April 29th, 2013 (2:17 pm)

Hey Savvy,

I guess it’s important to leverage when you can afford to pay off money.

@Morgan,
If you are ready to borrow for your house, you might as well consider it to buy an asset that will product income. I find mortgages riskier than leveraging to invest in a business!

@Krantcents,
I agree with you that mortgaging a property to buy another one is probably one of the best and easiest way to use leverage!

I think this worked well for you but doesn’t and can’t apply to everyone. You must have practiced a lot of self control during repayment period and lived quite frugally, which most people who borrow money don’t know how or aren’t willing to do. I agree that leveraging wealth through borrowing money is sometimes a good idea, and if you do repay your debts before 35 it obviously worked in your favor. But it seems like more people would be stuck in a cycle or borrowing and repayment because of lazy or wrong money management.

by: The Financial Blogger | April 29th, 2013 (3:06 pm)

@Kelly,

I’ve always borrowed money I could pay off easily. The additional payment was set in my budget prior to borrowing.

I’m actually paying off my debts now since I want to make the biggest leverage of my life in a few years :-) hehehe!

Sounds like a good plan! And, if for some reason you come up short at 34-35, you can always just continue to work, work more on the online business, or maybe have your wife go back to work as well as the kids are older?

Where there’s a plan, there’s a way!

by: The Financial Blogger | May 1st, 2013 (5:31 am)

Hey Sam,

for sure, if I still have to work at the age of 35 I won’t be depressed :-)

I don’t think my wife will go back to work full time, we enjoy our lifestyle as it is right now :-D

I am quite impressed that all worked out so easily for you. Okay, well maybe easily isn’t the right word, but it went smoothly unlike how it could turn out for several other people. There is definitely the right concept behind it but I have never heard of somebody who had so much success with it. Lucky you.

by: The Financial Blogger | May 2nd, 2013 (4:45 pm)

Hey Mary,

what do you find so surprising? most people borrow to buy their house and most of them pay off their loan without problems. So why would it be different if you borrow money to actually generate additional income?

I think there is a huge difference between useless consumer debt and a calculated borrowing for business expansion purposes. I do agree with you that borrowing has its place in business and perhaps even investing. However, consumer debt is absolutely useless and only accomplishes one thing – drain your income stream which you can otherwise use to buy more assets. The problem with out society is consumer debt, not corporate debt, which is why it is so often mentioned by financial advisers in a negative light.

Having debts is never a bad thing as long as you will use the money to benefit you in the future. A lot of us have debts even those we consider rich. What is important is we are able to pay or have the capability to pay off the debts we owe.

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[...] Since When Is Paying Off Your Debts a Good Thing? This is a risky approach. Taking on personal debt in an effort to grow wealth is fraught with risk. (@ the financial blogger) [...]

Debt can be a good thing if you use it correctly, I have debt on my credit card where I don’t even remember what I used the money for, I guess this is bad debt. Conversely I have a buy to let mortgage and after I make my repayment on the debt I still have £200 in income, that’s good debt. I think personal finance blogs need to make a distinction between good and bad debt.

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