Do You Need Debt to Reach FIRE? How to Use Leverage to Build Wealth
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IT goes without saying that americans are in debt. The average debt in amErica is one hundred and four thousand, two hundred and fifteen dollars, which includes mortgage, car loads, credit card statements and student loads. Debt peaks at age forty to forty nine, and the largest percentages of the average consumer market.

And I think a lot of people on the fire movement ask themselves, what should I do with this debt and what death should I be taking on? We're gona cover all of that in today's episode, so you can avoid the common pitfalls getting in your way. Hello, hello, hello. And welcome to the bigger pockets money podcast. My name is manny jenson, and with me, as always, is my quarter panel cold scotch.

Thanks to be here together. You and I make fifty cent, did you know actually, fitty said, has some great life in financial wisdom to impart on folks. I think there's two quotes and particularly that stand out there.

One is, if you die at an elevator, make sure you press the up button. And perhaps the more relevant piece of advice that he sent has is get rich or die trion. So go check out for more financial wisdom like that.

Ah you can find this albums on spotify and anywhere music is sold. Alright, with that bigger proxy, a goal creating one million million airs. You're in the right place.

You want to get your financial house in order because we truly believe any of freedom attainable for everyone, no matter win or where you're starting, whether that's fifty cent or with several million dollars in debt today, we're so excited to be joined by amenda and kao m. I'm sure everyone is familiar with if you have listened the big cast for some time to see. Ys.

great to be here. We know the average american has one hundred and four thousand dollars in debt. Let's all discuss what, if any, debt we have. And if you don't have any debt, when did you pay off your final debt? Scott, i'm gonna start with you to any debt.

I have one point nine two million dollars in outstanding mortgage across our rental portfolio. I have a zero dollar mortgage on my primary residence, and I have a sixteen thousand dollar loan on a total to rap for that I purchased two years ago, and that is IT. I have a small credit card baLance. I pay off and full each month, but I did not count as dead.

I would say that I don't count that as debt. Either of millions of dollars in debt is what I heard josey Scott. Uh, that but then you said it's across your rental portfolio, so that's not really personal that that's your business that that Scott, rental portfolio business debt. Wouldn't you say the question was .

do you have any debt? So I I was like a well, i've got a list all of my death there. There are five mortgages across five rental properties in the greater denver area. Um they I am very comfortable with that that all that dad is locked in between three point three seven five percent in four in a quarter um percent. So it's all long term mortgage ages and it's reasonably lightly levered somewhere between I was and percent OK.

So I approve of your dead AManda. Let's look at your debt load.

And like rose IT sounds like Scott practices what he preaches so that feels a very trustworthy mine is A A little more simpler er I have no debt. I have I at the same as Scott like I use a credit ard for every single thing in my life but I paid IT off in full every month um and I have no that okay.

so I scored as millions of dollars in debt. AManda has no debt. I think AManda wins.

Well, I also don't have a rental portfolio of five homes.

So so AManda, did you ever have that?

I did. I ve ve had boat loads of IT at some point or another. I paid off my final piece of debt which was my twenty fourteen four escape which i'm still driving her today um I had like a one percent interest rate on the thing and was making the minimum payments for as long as possible paid IT off last summer and it's one of those things where like I said, I was paying off as slowly as possible because my credit score had been in eight forty six and IT dropped eighty points when I paid my car off my last like three hundred dollar payment IT did recover but um that .

was a sad day dear credit score.

people come on. yes. So litter a fake report card for your money.

a fake report card for your money that you kind of have to have because nobody will give you credit if you don't right? exactly. Okay, kyle, a man has got zero.

Scott has millions. Where do you fall? I'm i'm guessing kind in the middle.

H yeah probably more toward Scott. I'm million. I'm not going to give the exact numbers that i've got um but it's on it's on mortgages, on rental properties ah and we will talk about this later on a as we get into kind of like philosophy on debt and where we've come to and where we've been over, over the years.

But uh, you know that's that's a kind of debt i'm super comfortable with if it's had a good L T V to the properties and if got good cash flow on the properties and reserves savings to uh cover things that come in that are unexpected because that always happens. Uh, but i've know i've had student loan dead in the past, has been paid off and never had any credit card debt. Uh, you know and we talk about vehicle that too uh, I do have some vehicle that mindy tells this is jump to you what what do you got?

I have mortgage debt and I have a line of credit against my afterdeck stock portfolio holdings that I used to buy another house. So it's kind of all house related. I do have a credit card that I swipe on everything and pay off at the end of every month. Um I did have a loan for a zero percent interest loan for my daughter's braces that I just recently paid off cash, got a braces on. Now SHE has a beautiful smile, and I have been very, very conscious about not having consumer debt just because I don't like to be in debt, but I also don't consider mortgage debt to be debt.

I was really interesting to here everyone's takes on dead here. So kyle, I think we have the similarities in terms of how we how we think about these things and and that's going to be a fun discussion here. I'm super interested that you essentially dead free, AManda and lindy is a discarding her mortgage, which I would be, I would feel way I would like love having a paid off primary and I feel debt free even though I ve got the millions of dollars mortgage that I I talked about previously because I don't have to pay for my personal home on there, I could know her problem rental like just tell mal h is a way I view IT um so ways let's talk about when we first started out on our fire journey. I want to hear from folks about whether you prioritize paying down dead or whether you prioritized focusing on investing and what influence to those decisions in AManda.

let's start with you on that. yeah. So for me, I feel like I started my fire journey before I even knew what I was called, right? So like you, I feel like once you're kind of in the personal finance space getting a handle on your money IT comes down the road at some point you're like, oh yeah, that's the thing I ve been chasing. So for me um you know I grew up really, really poor.

So when I finally graduated college and I got my first you big girl job um I thought I was rolling in the big bucks and definitely did not have a grasp on how many works at all so I had a bunch of student loans, but I also knew that I was supposed investing in my four one cab but then I was also spending more than I was earning because my salary was like thirty seven thousand dollars. So at the time, I was just kind of throwing a little bit at everything. If you've seen that mean where the houses on fire and SHE trying to threw like a bucket of water on the house that's on fire.

And so like nothing is actually getting accomplished, I would say that's how my journey started. Like i'm throwing a little money, epic credit card and putting a little money into the four one k on budgeting sometimes. But IT was, I would say, about a year into my first like a corporate job that I really started sitting down and and thinking like a guy needs to come up with a plan because IT seems i'm not actually moving the needle at all.

And IT was definitely a learning journey. I prioritized paying down my student loans because having all that debt free to me out, which if I could go back in time, I would take back, because my student loans were like percent interest. So I didn't need to knock those out in like six years.

So I probably go back in time and and the prioritized battle instead invested the difference. But you know, over time, I think it's evolved. Like I said, started out a little bumpy.

And now I would say I prioritize investing. If I had any high interest debt, I would be working toward that. But any low interest that, like if I got a different car that was low interest, I would not be rushing to pay IT off. So that's kind of how I feel about IT make the most use of my money.

We have to take a quick ad break, but while we are away, we want to hear from you what kind of debt do you have. You can answer in the spotify or the youtube APP.

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by a kal mass and made of of um kyo. Let's do unix.

Yes, started now. I was kind of one of those. I don't know you called a weird person. But like like when I was in college, I was out of state for college, go to the airport and i'd buy like a personal finances book every time I went through one of those book bookshops in there and you know one of them is the total money makeover by dave van zi, you know um the the David bc um what is that millions I to remember the millionaire next door is won by the Stanley several those books.

So I had all these things go through my head, kind of like, AManda, like what do you just throw things up? But I think i'd landed on the dave rams the thing early on. And one of things that really influenced me was when I got married and my wife was basically, I said this before, I kind like my venture capitalist and me starting my financial planning for my guy made nothing.

I had no clients and he was just my sugar mama um SHE had a real job and he was making things and he hated her job. And the goal was to not have her work that job anymore. Go part time helped me.

So basically, our priority was to eliminate every monthly payment we had, which means that you have less that you have to live on. So the faster we could eliminate the largest of monthly payments, the sooner we could take a job where, you know, I made less SHE could make less in a job that he may be liked more. So our goal was knocking out every payment we had, and that was student loan dead.

That was a little bit a car that that he had not got married. Um just everything then that I can't remember how many a few years IT took us to do that. We lived super, super lane. So that was the beginning of our journey. That was where we landed and I wouldn't change that actually.

We paid off low interest rates, student loans in the freedom you in in that stage of life, the freedom feeling of that i'm in the day of anzy camp know i'm a different for this season of my life. But in that season of my life and the goal that we had of reducing our monthly required cash outer, that was the right decision. And I do the same thing absolutely again.

the same way right. Mindy, um I know you you have a lot um of depth here to your answer. You tell us about your situation, about how you private investing.

because I didn't have any debt. But I also had no idea what the fire movement was. So my husband was having a terrible day at work.

He banged out on his computer. How do I quit my job earlier? How do I retire earlier then a pops, mister money must ask is like, oh, that's interesting.

So that, you know, created a rabid hole that we dove down into and we discovered that we were already on the path of financial dependence. We just didn't know that we have been saving for that. We were saving for the future.

So we kind of prioritize a little bit more. We focused on, uh, what our expenses were and we focused on being able to invest more. We took some investment risks.

We were heavy into text tucks. We didn't do anything about, uh, index funds because we never heard of them. Uh, I don't remember when we first started investing in index funds, but IT was probably a decade after we started our finance.

Dirty Scott, how about you? Did you prioritize paying down dead? Well, clearly not because you think millions of dollars of dead is the best way to go.

Well, I started I started my my journey um basically broke with a couple thousand dollars, which is a huge privilege because I don't have student loan debt or any other any of those types of things going. And when I started my career, I needed a car. So I body brand new in two thousand and fourteen years to Carola.

And remember, for a long time I would have been like, that was the worst financial decision in my life because I should have bought a two thousand and seven toyota ol that was much cheaper for IT. That was, yeah, that's our ridiculous. I was.

And on that so that that was a big part of that. I had that load at one point nine nine percent. And IT bugged me for the next five years that I had that debt as from a personal perspective. So that's how funky I think I am to the largely but had no problem the next year taking on a several hundred thousand dollar mortgage from my first duplex house hack um because I just viewed IT completely differently and leverage and how I was an investment on that front. And I essentially have never wrapped up any type of personal det what soever um in my life again good fortune um very you know very privileged from my upbringing and had have college paid for, but i've only ever taken out loans for rental properties or my two car purchases .

so i'm here you say you prioritize collecting debt instead of paying IT down but for a good reason .

yeah the thirty year fixed rate anie mortgage that at three and four and half percent is to me that was just like an unbelievable window of opportunity. And I tried to take adventures of IT, not the point where I couldn't sustain that was a way beyond, way in over my head, but to take adventures of IT in a way that would have a really meaningful impact on my life. Elong term. So I played I think that holding those and never paying them off will be a big advantage for .

the next twenty years. okay. So there's a lot of different schools of thought on debt in general, and i'm hearing a lot of different schools of thought here. But also kind of the same guy. Would you recommend somebody following in footsteps if they are on their journey to fire? Or what would you say to somebody who is on their journey to fire with regards to their own death?

Or guys, I think that if you starting from scratch and you want to get to financial dependence in a relatively short order and you don't earn a great income, then something you have to take some kind of risk. And for me, that is always been the obvious risk in that world is in a house hack. Um there's just not a lot of other great options like that.

You might take a sb alone too if you're really interested the business buying rather entrepreneur ship, but at some point you have to take a risk. Otherwise the brutal reality of saving you making fifty grand saving for attend twenty percent of that um and investing in the stock market will just need to compound over thirty years. Yeah I think i've largely pursue at the same way that I did um to that effect.

I think that one of the things that's bugging me um around this is the mortgage debt and the personal debt and I never really had to face that situation um because the way I approached my house hacking career in life. But for example, I have a savings account, my emergency fund, which has more than the baLance of my car loan, uh of sixteen grand and which is interest to two and half percent. And the interest rate I get on the savings account is like four percent.

So it's all simple interest and it's all incremental. So it's all tax at the highest relative bracket that I mean, so we're really getting a spread there by not paying off the toyoy around for one. And then why is that different with my rental property portfolio? Well, the reason is that the personal loan I can't deduct.

I can't deduct my interest payment on my car as part of my expense profile, but on the rental properties, the interest is absolutely deductable. So it's a no breathing or to keep my interest rates on my mortgage, my mental properties at the three and a quarter of four and a half percent range. And it's kind of a toss up the way that I managing my money personally about whether I should even have the car loan.

So that framework, I don't think with something I had fought through previously. Um and I think that if my car loan were at like four or five percent, I would provide paid off rather than keep any like there's no point having the extra money in the savings account earning four half percent when i'm negatively advertising is a spread between that and the the car land, for example. So that's quite the only like front like different I would be thinking about or you know, ideas I don't put in someone's head is listening to this to to think about their debt situation.

Now, AManda, how do you think someone should approach debt on their fire journey? I think that IT .

completely depends on the individual because I think there is the math answer and I think there's the feelings answer. So the math answer could be like, let's put IT in a spread sheet and see what makes most sense for you. If you have a super low interest rate on these other loans in europe actually going to invest the difference, that's the key part, right? Then maybe IT makes more sense mathematically.

And I say that's the key part because a lot of times people will be like you I only have, you know a three percent interest on this thing. So that's great. I don't only need to rush to paid off and then they go and spend the extra money that they would have had versus investing IT, right? Because that's kind of how we think about IT.

How was Scott saying even with his his savings account? So I think there's the math answer where you can sit down and saying, like, okay, am I earning more interest on this money versus what the dead is costing me? So that's the right answer. But then there's also the feelings answer, which is how does the dead make you feel? So in the earlier when you like, oh, I don't count my house debt as debt, i'm like I feel like I would because as somebody who's had like their home taken away from them when they a kid, you know like you don't forget about that type of trauma. And so I think that if that's something that's like eating away at you, if you're afraid your car could be taken away because maybe IT was your mom's car, was reboard when you were a kid or like you didn't have somewhere safe um or stable to live like paying down your mortgage or your car or something like that might be more of a priority for you because I just might feel Better. So I think IT totally depends on the individual and then their own experiences with money.

I mean, I love that you called out math and feelings because everybody started their journey at the place that they started, not where anybody else started. So of course, the financial independence community and the financial media. Is telling you all that bad, you should pay off everything, but if you grew up financially insecure and having any sort of that at all gives you the heb G B S then scotland.

I telling you that you shouldn't pay your mortgage because it's only a two percent, shouldn't be something that you like. Well, I guess I have to do that. No, if you want to pay IT off, pay IT off.

If you want to be completely that free and you know live by dave M S. Montreal and not have any credit cards. And you know all of that, that's your choice. Okay, kyle, how do you think someone should approach debt on their fire journey?

You know, everyone situation is so different. And this is something that you know, if you read any decent personal finance book, they will have a section or an hopefully large section on behavioral al finance. You know, everyone behaves different.

There might be the rat, are that the rat? There might be the math answer, but there is also the what gets the job done answer. And if you look at history, you look at research, everything points to we do not behave rationally.

We behave how we want to behave. So the trick, as a financial planner, when I would work with clients, the trick was to figure out what someone's history was about, what their goals are, what behavior will get them there. And IT can be totally different for different people.

Um so you know, to answer your question, you know how people should start out IT totally depends on their background and where they want to go to you. Like how I started out just knocking dead out really fast. Ssl, we could get my wife out of a job.

SHE doesn't like that was perfect for us. That's not going be perfect for everyone. Someone who ideally know the math thing would be house hack, do again.

How seck do IT again? You know, like just keep doing that. That's really in today's economy one of the best ways at any income level. You can build wealth long term, but IT just doesn't fit everyones situation or their goals even so, I don't I don't have a specific like recommendation for people. What I would say is that, uh, be willing to learn over time and adjust your thoughts over time.

The longer I worked with clients, the more I looked at people's baLance sheet, their own debt, their own behavior, the wealth that they built, my idea of what risk was and what death, the risk associated with certain types of that are line with things like inflation. Uh, really got influenced. And I think you know I am a different person from a financial viewpoint standpoint now that I was fifteen or twenty years ago by far.

Uh, so just know that you're the seasons of life change and you should probably change along with that, hopefully learning along the way. You know like if you learn A A certain strategy that works well for you at a certain point in your life, don't expect you to learn our work really well for you the whole way through. Be willing to adjust as economy changes, as your family life changes, as your health changes. These things can really influence where you're starting today. But also if I give you up to restart or change course later on down the line so as a terrible answer, i'm sorry, I have no uh, specific way to start.

I think that's a great answer. Now yeah, like I could agree with with right. I would never today put ninety five percent leverage again my entire network to try to get to the next level.

But like I absolutely would do that again if I had twenty grand. I was trying to get started by my first attack so just seasons a life different for everybody and many people are like, that sounds terrible. I would never do that and that's fine.

There's just different approaches, different strokes. Um let's talk about um that concept that you just brought up, kyle here, how that strategy changes as you get further along on your fire journey. And india love to hear your approach. How did they start out and how did they evolve?

Uh well, how would started out is that I had no debt outside of the mortgage on my primary property. And i'm sure during the course of uh, the renovations that I was doing on the various live in flips, I had some debt that I would acquire because if you charge a certain amount on your store credit card, then they give you no interest for six, twelve or twenty four months. So I was taking out zero percent interest low on building supplies.

And then in I I tried really hard to get that twenty four months because I am going to sell the house in two years. I could, if I timed IT right, sell the house and then pay off the dead and paid no interest on that. But again, because it's a zero percent interest, right, because I had the money to be able to pay IT off.

If I had to, I didn't consider that to be debt. Um I have changed my dead strategy a little bit in that we took out a line of credit against hours after tax stock portfolio. I think this called bit equity and equity line on your stocks um at one point the the light we like we had this much margin between what we owned and you know what we owned.

And then we watched that margin goes smaller, smaller, smaller, smaller really like maybe something is gonna happen. So we took out a home equity line of credit on our primary house just in case something happen, something did happen. We had to throw money at that, uh, from the home equity line of credit into the line of credit against the stocks until the stock market rebounded and started going back up again.

Um that was a bit of a hey, I really don't like that scenario. So now we've started thinking of ways that we can pay down that, that margin loan faster marginal, that's what it's called. But for the most part, we are not going out and acquiring extra debt know just for funders. And we always pay off our merger, our credit cards every month regardless of the baLance. And that's never going to change.

How about you? Ama.

I feel like mine has changed as i've learned more. So you know I mentioned in my twice, I was just so scared of having any debt at all. Um so like I said, I rushed to pay you. I realized I was creeping up a little bit on my credit card is nothing crazy like a couple thousand but I was like that's still a couple thousand and i'm paying interest on now I understand how interest works.

So IT was like, I need to pay those down and then I wanted to get rid of my loans and I just wanted to get rid of debt altogether because IT, I thought I was really, really scary. But now that i'm in my authorities, i'm like, okay, well, I now understand how debt can also be leverage. So if used correctly, IT can work in your favor. So I do think it's changed as i've learned more and understood how IT works and understood my own risk tolerance and you know those types of things. So I completely agree with what I was saying earlier about seasons of life because i'm sure probably in my forties and fifties that will look given different.

We heard a little bit about don't based your previous response to the last question, but any other color you look that out?

I think i've learned over the years the importance of inflation. Inflation is a huge risk that people do not factor in hardly ever into their financial life. And I just saw IT with client baLance sheet, the people that had things like real estate or a decent size stocks portfolio, the long term hedge that was and people that so I didn't work with higher t worth clients I worked with like middle amErica um as clients.

So these are people some of them social security was their chief source of income with like maybe a fifty thousand or one hundred thousand million, I ray, that was their back stop, where they take a little bit extra money from. And that even though social security, you will get a cost of living increase every year, IT does not cover true inflation, not even close when depending on what your life situation is. But in general, that does not.

And not having that good head against inflation over the course of years really starts to hurt. So that was one thing that you know, my strategy has really been structured around inflation as a piece of of the puzzle. And like you said earlier, Scott, the window that we had of two to three percent interest rates, I at that time, I was doing so much research on historical inflation in societies like for the last couple thousand years, and IT was just nuts that we could take out loans and refinance in two to three percent for thirty years fix.

And I was just trying to push everyone as fast as far as possible to refinance current loans to lock those in place. And I I don't think we'll ever see that again. Like I think that is just gone. Uh, so that's one thing like that's a hedge that you can put in place. And if you ve got cash law on a property cover that or even if it's a business that you have and you have some sort of business loan that is backed by probably something secured like a property or a building.

But uh, the cash of the business that is a good way to hedge your debt and head your financial situation in the long run rather than just trying to um steer clear of debt completely because debt, well, how do I say this not sound like I just want everyone to go in a debt well leveraged debt with good reserves to back up. There's something bad happens. Reserves means emergency funds is one the best ways to hedging against inflation in the long run.

And I also think when you're Younger, uh, there's a huge value to not swinging for the fences, trying things that you might not try later on. And this is someone, if anyone listens to the radical personal finance podd cast Joshua, it's it's another one in the world here. This is something that he's changes view on a lot over the years is that when you're Young, you can try things, you can make mistakes, you can maybe go broke, but you can recover, and you only have a small window of learning those lessons.

A and and sometimes it's good to learn nose, and sometimes you learn such good lessons that IT benefits you exponentially down the road as opposed to not trying something that might be, quote, a little bit more risky again, this word. Sk, you know, it's all built around risk. And but how do you define IT? You know, if you don't put inflation into the scenario, if you don't put in the risk of not taking a chance on something that could be great, you know and yeah, I think there's just so much more to this discussion.

As you can tell, i've just become so much more. Nuances done IT over the years. And it's a fun thing to talk about. It's a really fun thing to talk about.

Stay tuned after a final break where we're going to break down the irresponsible ways to handle that and what you should not take on how that could impacted .

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Let's jump back in. How about you got did your death strategy change as you got further down the finances journey?

I think with I going reframe a few things said in the way that I I think about IT is the same, same boat process just a different, different way of spitten ed out on from my view, when I guess started in the journey was I didn't have any wealth so I needed some wealth to protect and that's why I had deliver um I real state was the tool.

But if I just if you take a way to average real estate is a definition, it's like as the third of the CPI IT is inflation, housing cost raight in in a very literal sense. And so you buy a couple of if you have if you have a couple of paid off properties, you have a like the definition, at least a third of the definition of an inflation protected portfolio. Sure, there can be volatility on there, but IT becomes less about how do you continue to evolve the wealth and how do you build an inflation adjust a portfolio.

And that's where just like kill sea, it's a stock portfolio, is a real state portfolio. And over time, that, that real stay portfolio will deliver. And I will just preserve wealth in mine with inflation, preserve an income stream that should be, by definition, again, in line with inflation.

And that's the that's the way I think about IT is there's like there is no point in facing with inflation if you don't have any wealth too, you don't have any wealth, you have to get ahead of IT somehow by earning a lot, spending very little in investing in a way that can now place IT. And once you're well as your strategy evolves and hopefully you be going to approach fire over the years and decades, then IT becomes about preserving wealth there and dead just amplifies return and or amplified risk. And so it's just work can you later that to move faster? You never want to get in over your skis um but if you don't use IT at all, you might be there five, ten years. You might get there five, ten years slower.

Yeah I just this is as i'm here in me and Scott k, i'm just hoping we don't lose anybody here to you know we're talking about a lot about inflation and leverage. And just for everyone listening, this is really something it's important enough that if it's kind of going over the head or or not not if you're not comprehending IT, I would definitely look into IT more. We had our economy is built on the assumption that inflation will be will happen.

And if IT doesn't, the government literally prints money to make that happen at a certain point, and then subtracts money to make IT happen a certain point. So is is just the the ocean were swimming. So understanding that a little bit is, is super important to be able to keep pace, even just keep pace with living expenses. One weed ends now cost fifty seven dollars for ten weet thens. This is really important stuff.

You know, I think that IT sounds like there's a general agreement around avoiding consumer debt. We even talk about super high interest consumer debt. This is a bigger pockets money. We assume that, that given at this point.

But there, I think our bounds for what's responsible, what's reasonable royalty of the debt and you know, alignment that they can be used as a tool depends on your comfort level around there. IT can be powerful, but I think there are certain restrictions we should put on IT. And I love to go around a the horn here and hear what you guys think about what's reasonable and what's not when I comes to that. And AManda, I love to kick IT off with your thoughts on that.

yeah. So you know, earlier I was talking about how there is the math answer and the feeling answer, right? So on paper, what makes most mathematical sense? And then how do you feel about the debt? But I think those two points do converge at a certain point.

So if you have, for example, a lot of credit card debt that's in the twenty percent, maybe from thirty percent, that's when we start reaching a level of just being straight up irresponsible. There is a very popular tiktok trend going on right now. Where are a lot of girls out there are like i'm in my credit card that era screw IT.

I'm going to loud lemons safra, i'm getting all the goodies and I will worry about this later and that could not be a poor choice that is such a small blip in your life where you're going to, like, enjoy these little treasures and IT is going to haunt you for potentially decades. So I do not approve of this tiktok, trying to think it's very irresponsible. And so when we think about debt, like I said, theirs the math and the feelings, but they do converge at a certain point.

What do you .

think I first, I want to, uh, over enunciate what I said. He said, I don't think this could be poor or choice. I don't. I want to make sure people didn't hear you say, oh, I don't think this is a poor choice. It's IT could not be a poor choice.

You could not make a worst choice than getting in massive that in your at this twenty twenty five thirty percent interest rate uh, I don't even understand how credit card companies are allowed to charge that and not be subjected to user laws. But either way, you are making such a big financial problem. For what a pair of leggings. So makeup is that was so for ourself.

Yes, skin care makeup. yeah.

You know what targets sells the same thing at a whole lot lower Price tag and how many percent leggings do need? You need one to go to the gym today and one to go to the game tomorrow while you're washing the ones that are dirty today. Or you could reuse those. I've done that before, but you know where twice before you wash them.

Love the violent agreement there. I love your your thoughts of this, of the subject as well .

that i'm in the same. I worry. We went to through this episode. We talked about some of the good aspects of debt and how to do IT responsibly, but I love that we're kind of summarized in IT here that there are some major ways that you can just get in to trouble.

You know, like buying things that don't appreciate value in general, you like buying a hamburger ker and paint IT off over twenty five years. Not a very good idea like that. So that's the biggest thing.

You know, if you can just like buy things that appreciate with debt that maybe a rule to put in there. There are other rules along with that, but if IT doesn't appreciate in general, don't buy. And again, you know something that has twenty percent interest, a credit card IT is just you're signing yourself up for surbiton de in the long run.

The thing that I would just add on is the importance of savings and reserves, the importance of stop gaps. When you do take on responsible debt, even because you never know what's gona happen, you don't. So like in my case, with rental properties, you don't know when attends gon to give notice and move out and you're going out to renovate a unit.

It's going take three months or four months to get someone back in there. You don't know. That just happened to me yesterday.

I got a email, one of my properties, long time tenant is moving out probably enough to do some expensive renovations on the property to get IT listed, get someone back in there. The move out in the middle winter, it's going to be spring almost probably to we get somebody in there. Uh, but you you have to have the cat and that property has a has a mortgage on IT. I'm going to make a mortgage payment for three to five months that i'm not in any rent on, but that's built into the performer of the property that built into the savings that's gonna happen.

So any time you take on some sort of investment that I mean, do if you want to sleep good at night, have a whole bunch of reserves like half savings account, also have like a ratha ra know any other account that also is just liquid even if it's in the stock market and IT goes down by thirty percent, there's still something in there and you can get to IT. Uh, so just, you know have those reserves as your in you like in the real state world, as your properties increase, if you are someone who likes to have a certain amount of healthy leverage or debt on them, continue to increase your reserves proportion unai don't get ahead your skies on that. Uh, but yeah, that's the biggest thing. I mean, that's the way to sleep good at night. Savings for sure.

Can I add just like one thing I don't know an office like fit in, but um regarding the credit card debt piece of things, I I thought this was something that everybody knew. But after kind of like looking at the comments in these tiktok trends of these girls, you know who are in their credit card debt era, when your credit card gets closed and IT sent to collections or what not, IT doesn't just disappear.

IT literally follows you for life, so don't get caught up. Some of the tiktok friends are like, really, really cool and inspiring. This is not that. This is not cute. Also, I just want you to call that out that don't get swept up and like the hard mentality of screw IT, i'm just going to add IT to my credit card and worry about IT later because IT will continue to follow you. So put the tiktok APP down if you are one of those people right now um and pay that part off yes.

your decisions, no matter what they are, follow you for a long time. You know like what you do in your Young years for good or bad, financial or not. You know those can hat you and IT with the era of credit reporting and the amount of data that's out there, this stuff does not go away. And lenders or insurance companies, cell phone providers, they want that you will pay more down the road for a few for your credit card spending season. It'll her I have two .

reactions to do what's irresponsible um thing here. And i'll start by saying what i'm not going to talk about is the taking out credit card to buy A A because know that so far I do I feel like we're not know what you should not be doing that. And so I think we're all line on that.

I think that where I when I think about debt, there's two things I think are people are going to trouble with in the real estate world, in the bigger pockets money world. And one of those is, you know you you heard my dead baLance earlier. Some people went and took that to crazy extremes.

So even you if if it's multiples of your income in a way that is that is so far out of hand for you to deal with. Um it's not it's all acquired in a relatively short term basis and you're going all in in a way that you can't sustain across the decades. I think you're setting yourself up for a problem because even though real states a great bet or many asset classes are a great bet over the long run, short term volatility can B, K, you.

And the goal of the game is to keep things compounding for a lifetime, and you eliminate the compounding when you go B, K. And we're gonna see some real state investors and some real state investments go in B, K. In the next few years.

We've already seen IT in a couple of cases and that, that there's an extra limit. And you need to know what that is. My loans were actually muted over a decade, one property at a time every two years ish, that's one. The second thing that I would call out is a mismatch between the use of the debt and the as you're gonna hold. And my favorite example of this is the he luck.

When people, when you take sixty thousand dollars out for A E lock and you but use IT as the dawn payment on a two hundred and forty thousand dollar mid western rental property, you gotto payback the he lock that he that means he looks a short term loan. So I don't know what you're definition is. Short term loan, but it's probably less than five years.

That's a thousand dollars a month, and not a lot of the middle western single family rental properties are spitting out of thousand dollars among the cash flow after a hundred ninety thousand dollars in mortgage debt. Tell you, pay off the healing ck that things gna suck a lot of cash out of your life over that. In the reason that's happening because you've used a short term debt instrument to finance a long term down payment and people away with this over the last ten years, and they're not going to over the next five years.

And that's a problem that I like a rist that I want to call out as a mismatch. Use the map, the tool to the use case if you're going to use that from an investment. Same point. So those are the two things I would call out that I think i'm seen that a fairly risky out in the investing world in terms of use cases for dead.

Got you explain that so well, you're really good at this money stuff. You should do something with that because I feel like you you nailed IT because, you know hearing about millions of dollars worth of that, I feel like you start articulated about so well.

Yeah, I think, no, I am like, do I feel like if if I put bottle that once I was a higher L T V, i'd be pretty uncomfortable. But having stocked out at very gradually over ten years, I feel much more comfortable with that. And I think that changes the perspective. I don't know, kyle.

if that's how IT went for you as well. Yes, very similar scenario. I D had a bump and I T more because I I so sold a business.

So I just IT, was that more not really buying, it's more of transfering one asset to a few other assets. Uh, but yeah, I totally agree. You know you spread over time. You talk about before dollar cost averaging into properties over time, just like you would stocks and even dollar cost averaging into good mortgage, that over time and over time, you know rocking in long term the straight debt and having a spread of cash low over what your property requires and they spread of cash reserves over what your overall situation requires your living expenses.

You know, I think if you can start to think as you build these other through your financial life, you have at the beginning usually have one employer where you're trying to make some money and then you buy a rental property. Now you essentially have two employers, one that's also pay you just a little bit. You can build more employers over time.

You you're reducing risk as long as you're not taken on too much liability with each of those employers, which you know different rental properties, stock portfolios, sources of income in your life rather than one employer. So if one goes belly up or you need to throw some cash out IT for a while, you have those reserves. I just pump in the reserves thing here.

I just think that is just a big, big deal and got you touched done. And I want to push you on a little bit more. The name of the real estate game is to stay in IT. You know like IT will go down. And if you go out when IT goes down, you lose, you know that's when you need to be in IT and you make IT through that and that's what when real estate is magic in the long run um but if you go out when it's down IT IT hurts. Really bad sky, I was .

teasing you at the beginning with your millions of dollars in debt, but then you said there are fifty to sixty percent leveraged, right?

yes. So there there's a good amount of buffer in there, right um on some of those. And that's been puts and takes over the years. As you buy in two thousand fourteen, things go up and you refinance and one when rates go down. So there's a lot of there's there's like puts and takes that go over there that i've changed that leverage ratio over the years. But right now, um i'll also call out that because you if I not going to refinance any these properties and i'm not going to sell them because the long term bed on there and I wonder how i'm gonna ance the next property may be via and assume able or seller financing but probably with just cash and I might go to a cheaper market um as part of that as well um given the current higher interest state envionmental.

the point that I wanted to make is that you've got fifty to sixty percent leverage. I'm seeing people saying, oh, take out as much as you possibly can when you're buying properties, buy IT as an A A house hack, buy IT with the owner occupied mortgage ge to which you can get for as little as like three to five percent out and lived there for a year and then move out and do IT again and again again.

So you've got properties that are leveraged between ninety five and ninety seven percent. And that's kind of a uh, one way ticket to losing kle max game of staying in IT. And uh, you could absolutely lose IT.

I'm seeing people who are losing their properties because they can't make the payments because they also don't have KO S R word reserves. And they're just kind of hanging by the skin of their teeth and that just makes me so sad. So yeah, you, anna, stay in the the real est state.

I hate when we call IT a game. It's not a game. It's a business you have to treat IT as such. But if you want to be in real estate for a long term, you have to do IT intelligently for a long time.

The more you bought and higher leverage bought at that, the more money you made. And that worked for ten years, and I was sitting in there like, am I A fool? And I just sitting here watching all these other folks get super rich, super quick.

And if I just bought more and gone way more all in, i'd be wait for their head. And the problem is that the type of people who do that are often the people who can't stop, and they just keep going until they are forced to. And that can that literally, in some cases, translated individuals buying over a billion dollars in real estate, which is now worth six hundred million. And that's a huge problem in some cases on for that, especially when you financing IT was six hundred and seven hundred million dollars in debt and using a lot of other investor capital. So those problems are coming home to roost in here and will be a facility of the economy even though the long term investment in real state, if you can hang on, is, I think.

good math yeah. And the way that you hang on is by having reserves so that when something happens, not if something happens, when something happens and you need to put money into your property, you have the money to put into the property like when you tenant leaves and you don't have another tenant that that happens. That is gonna en to every single person who is listening to the show, who has realised ted investments of any kind.

If you have tenants in there, they are going to leave eventually and then you're going to have to find and do IT, and you might not be able to find them for a while. So you need to be able to flow that. And when you can't flow IT, that's when you have to sell IT always happens in the downed.

It's merveille w that is like the way to go is a rules real estate. So just be intelligent about your your investments. And also maybe you could have had the trillions more in realised investments, but could you sleep at night knowing that that comes back to AManda's feelings? Full circle.

okay. I think this has been an absolutely fantastic conversation. I always love IT when I get to talk to kill. I always love IT when I get to talk to AManda and I get to talk Scott all the time, but I always love that too. So kayo to have any last bit of advice for our listeners.

Now I just I would be encouraged people to try and not get overwhelmed with everything that we talked about, you know like like the fear, like and we're talking a lot about rental properties in here to and it's not the only way you ve got to go. Like you can keep things a lot simpler. Er, you can keep things very generic where you save a high amount of your income, you put a decent amount away for reserves, you reduce your taxes.

I mean, I could go off and a whole pension on taxes that we didn't factor into a lot of the risk and calculation of this stuff. Uh, but you can keep IT a lot simper than what we're talking about here. So anyone's feeling overwhelmed, you know it's not that the main money habits that will get you to your financial independence goals still stand, uh, no matter if you're taking on leverage in a good way or or totally steering clear of IT, you can still accomplish what .

you're looking accomplish.

Absolutely, AManda. Yeah, I think for me, I would say to take a step back and think about what you actually want. I saw this step that this came out, invest pedia did some research recently that showed that the american dream costs four point four million dollars, which is one million dollars more than the average american earns over their entire lifetime.

And when I saw that, dad, I was like, double is my mind. Because what is like the american dream? What is that to me? That should look different for everybody. So I would say, take a step back and figure out what you actually want out of life. Do you want to go to the house hacking thing, and which is a little more complicated, you need to learn a little bit so you don't make some big mistakes, right?

Do you want to just to work your ninety five, put money in to your four one k in your rough ira work until you're sixty five, spend time with your kids on the nights and weekends and call IT a day, like, take a step back and try to figure what you actually want out of your life and what is going to get you there. So IT doesn't have to be complicated. IT can be if you want IT to be, if you want to earn as much as possible and retire as early as possible. But what does that american dream for you? Take a step back, figure out how to actually get there.

yes. Okay, Scott.

But yeah, I I think my my key takeaway are you know you use that only, I think, to buy assets that can appreciate over the long run and ideally that cash flow enough to service the debt, map the debt to the right tool and avoided in most other cases. Last parting thought i'll leave on top on that line is and we discuss this multiple times on previous money episode. So if you're regular listener, please forgive me for restating this for the until time.

But the less debt that you have in your personal situation, for example, like mortgage debt, the less wealth you need to satisfy the financial independence, retire early equation and producing sixty or seventy thousand dollars a year in income with a paid off mortgage, a lot easier from the investment portfolio that point in producing one hundred and twenty if you have to pay that mortgage payment, for example, that's what's going to add in there. Guess there are two big numbers, so one hundred, one hundred thousand, and you're going to pay more taxes when you realize that much income. So there's another play there that I think begins to change the math even further in favour of paying off that early once you get into the upper asians and began getting closer to the end of the fire journey.

Yes, yes. And yes, okay. I just agreed with all three of you. Um I can't top any of that because you guys are just amazing and I am just gonna ve that kill. Where can people find you online?

Now on social media, I hang out on social media anymore. I have a website, kyle mass dot com. Sometimes I do some writing there, but that's about IT the time i'm hanging out with my family and traveling and doing some rental .

stuff living the fire life, I guess so. And AManda, where can people find you online?

You can find me on social media. Show up a wall street a wolf with an e um my instagram or sheep fall street 点 com is my website got lots of good freeze and I do some writing there too and you .

can find scotland I all over a bigger pockets to ck com where we teach you how to invest in， realize the right way. All right. That wraps up this episode of the bigger pockets money podcast. He has got a trench SHE is AManda wolf. He is kill most and I am mi Jenny saying to the luu can you.