I was talking to a friend recently, about how having kids made him a better worker. He wanted to give his kids the best, and whatever happened, he needed to feed two more mouths each day. He said he had never been making so much money because finding money to cover food, clothing and schooling for the kids made him more productive than he had ever been. If you asked him, two years before becoming a dad, if he would be able to afford kids, he would have said “of course not, I barely make enough to support myself!”. And now the whole family had a big car and took holidays every year to the US or some exotic place.
I approach my investments the same way. Most people would be satisfied with a half broke life saying they can’t afford kids. Other would rely on welfare to feed the kids. And people like my friend would decide to have them nonetheless, convinced of their ability once the kids are there to provide for them.
I went into debt to invest
When I graduated college with some savings, I bought a first rental property cash, after begging many banks to let me go into debt to buy a bigger property. I was about to embark on a one year round-the-world trip, so couldn’t justify a safe income to cover the mortgage in case of vacancy, and they would not take savings as a guarantee. Had I taken the first job lined up for me out of business school for just 3 months before my trip, I could have had access to a mortgage and enjoyed the crazy raise in property prices in Paris over the past 10 years. The property I bought back in 2003 is the one I sold last year for double the price, but that is another story, and I couldn’t wait to go travel the world. So far I was debt-free.
A few years later, as soon as I went back to stable employment, I went into debt to leverage my wealth building. I bought a second property and even took consumer loans and 0% credit card balance transfers (with a 3-4%fee) to invest. And you know what? I busted myself to find enough money to repay those loans every month. Now that the second property is rented, it has a positive cash flow, covering even the last of my consumer loans. But when I was living in the property, I had to find enough to cover all those repayments.
My mum lent me money, an old friend lent me money, when the bank considered my debt to income ratio to be too high already. Never did I go on holiday with that money, or bought a new car or fancy clothes. I asked for the money because a) I thought the investment was solid AND b) I knew I would be able to easily repay the loans even if the investment went wrong or had a longer timeframe than the life of the loan.
I was not afraid
The loans were an opportunity to jump into the market earlier than if I had saved for it, and the interest rate I was paying on it was nothing compared to what I thought I could make by investing. Even if some investments went wrong, it was a price I was willing to pay for potential returns and accelerated wealth building. I did not let fear impair my judgment and took an aggressive approach to investing.
I was confident in my ability to make more money. I knew the pressure to repay those loans would push me harder. And the bank may have thought I had too much debt already, because it didn’t take into account my bonuses from work or income from many side hustles, I knew I could prove it wrong.
I had many backup plans
I took a few jobs tutoring at night on top of my 9 to 5 job. I started to write for several travel blogs. I translated websites for friends and waitressed at weddings on Saturday nights. In total, at any given time, I had half a dozen sources of income and my day job was almost as secure as being a public servant. I took a roommate to share living expenses, then two. I was 25 and only cared about reaching my goal, not how tired I was or how annoying the promiscuity would be after a long day of work.
And because I only spent money on what was important to me, mostly good eats and travel (more than covered by the travel writing gigs), the rest of my expenses were pretty low, allowing me to put a huge amount of money towards those loans every month. Before I got the investment and potential returns back, the money was long repaid. Except for that last consumer loan that has too heavy early repayment penalties to make it worth my while. But I have already made more out of it than the principal and interest over the life of the loan.
This accelerated wealth building strategy led me to the point, three years ago, where I could leave my day job, and then by age 30, live off my investments completely. I spent most of 2011 and 2012 traveling, then bought my little house in Guatemala cash last year.
Yes, I do believe in debt. To create wealth, period. Or try to as hard as possible. While that strategy is very risky, had I not been in debt, I would probably, like my childless friend, have been contented with a more relaxed approach to building wealth, or even worse, used that money to buy consumer goods or finance holidays, and financial independence would be decades away.
What are you thoughts on going into debt to invest?
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I like the saying use other peoples money to gain wealth. A lot of wealthy people know that they key to generate wealth may require you being in debt and taking risks. A lot of people are scared of the risk factor. The fear of the unknown vs buying a car or clothes and having something to “show” for what you spent. I am looking to get into debt for real estate investing. If I don’t it would require me to spend a lot of cash I don’t want to or do have for that matter. If I see a good investment opportunity I would surely jump on it. Like you I am willing to get debt to increase my wealth.
having something to show for is not necessarily true when you put nights out or groceries on credit and still pay them a couple of years after you have eaten the food, but I get your point that people paying off a stock are less than the ones paying off clothes or a car.
I think as your story aptly points out, it requires lots of discipline, focus and hardwork. Is it really worth it? Absolutely yes. Let’s face it, most times we cannot save/raise cash for big purchases all at once, it takes time and by then the opportunity’s quality points may have changed. Moreover, I have found that the debt-cloud hanging over your head gives you an added incentive to work harder and get creative at repaying it. As you point out though, its always to have a back up plan incase things don’t pan out.
it sure pushes you harder, otherwise you just stay in your comfort zone and wait for things to happen.
Very well said, Pauline. Borrowing properly to build wealth can offer great opportunities.
I completely agree and am using the same strategy and template to reach my own financial independence. I currently own a apartment building that has a positive cash flow and am looking to purchase a second one sometime in 2014. I live frugaly and avoid unnecessary debt. Inspiring to know others have made it… thanks for sharing.
nice! used properly debt can be a great tool.
Good article Pauline. While my opinion on debt differs from yours a bit, I do agree strongly with the fact that most people will never be fully prepared (financially) to have kids, and that they shouldn’t let that stop them.
I also agree with you that building wealth using debt is all about risk tolerance. There have been quite a few people like you (in less-stable markets) whose leveraging of debt blew up in their faces and set them back a few years financially. You just have to know what you’re getting into in order to properly evaluate the risk.
sure, I am ready to take the risk (single, childless, not afraid to go back to a day job if needed) in search of the reward. If everything had crashed I would at least have tried.
I think people are too quick to dismiss leveraging debt as a way to accelerate wealth creation, and I love the fact that you were able to leverage it in an effective way. I think there are definitely times that it can make sense to use debt to accelerate your wealth creation, though it always comes with some risk.
of course the risk is there, increasing with the amount of leverage. but in this case as I had extra income my debt to income ratio was not that high.
Borrowing to invest can definitely pay off as you’ve shown. The obvious reason here is that your investment is providing a higher after tax return (both dividends and capital growth) than your loan.
You’ve raised another more interesting reason – if you have a loan that you have to service each month you have a required repayment which is effectively forcing you to invest. There is no excuse to not meet the repayment, no ‘I might spend more money this month instead of investing’. By taking the loan to invest you are committed to your strategy and the monthly repayment will keep the investment front of mind as you make each month.
A few friends who were unable to invest became landlords just to have a forced saving every month, it can really help you become disciplined.
Great post, Pauline. We are a little (okay, A LOT) gun shy about debt, given the mess we’ve gotten ourselves into, but we would strongly consider it if we were sure of the outcome. I read not too long ago about a young girl, 14, who bought a foreclosed house with her mom for like $14,000. They paid cash, renovated and now are renting it out with a positive cash flow! That’s the kind of deal we’re looking for. 🙂
oh wow such a great project, a teen becoming a landlord instead of playing video games.
I think if you can do it, like you have shown to do, then I am all for it. Many times we write off the idea of using leverage when it can actually be used very wisely and accelerate your wealth building more. The problem I’ve seen too often to count though, is that investors just take on crazy amounts of debt when they have no clue what they’re doing and end up being in debt up to their eyeballs as a result.
yes, that’s the risk. You have to know either what you are doing or how you will repay it. I knew I would not be in a bad situation as the repayments were not a problem.
We’re not quite as agressive as you in using debt as leverage for wealth creation, but we definitely have in the past (we were basically double-leveraged on our rental property at one time, having a personal loan of $50K that we took out from family to buy it and then getting the bank to extend us a HELOC on it afterwards to buy another property…). And if the investment opportunities look that good in the future, we’re open to more risk again. But right now the risk/reward doesn’t feel there, so we’re a bit more conservative and have been paying down leverage.
There are always opportunities and if you don’t grab them now another one will come along later. I don’t think I would pay the mortgage early but if it were a personal loan like yours it makes sense.
Pauline, thanks for telling your story. It helps me understand where you we’re and what you were doing at my age (25). I’ve been growing wealth steadily for the past few years, and now im looking for ways to accelerate that growth. Im just trying to figure out the right balance of side hustles.
I know I sacrificed a few years but I was able to leave my job at 29 so it was worth it for me. I still managed to travel quite a lot before that and enjoy life but if you bury yourself in side hustles it is hard to do so.
I hate debt so I probably wouldn’t use it to invest in anything other than real estate. But, to each their own!
I agree with your friend. Having kids has made me a working maniac. I want them to have every opportunity and life experience in the world.
I can imagine how that released a super force to push you even more.
Our house is leveraged right now to finish our neverending house flip. I would not go the route we have chosen currently, mainly because our partners suck, but I would do it again for the right property.
I think the key point here is that you had backup plans and as you say “I knew I would be able to easily repay the loans even if the investment went wrong”. Not many people are in that situation where they could pay the loans back even if the investments fail, and for them this kind of approach can be very dangerous. You were in a position where you could take these risks and it’s cool that you did. But I don’t think that many people are in the same kind of position.
I do agree that having the added responsibility of a child, or a similar kind of pressure, can make you more focused on your financial security, whether that’s earning more or what have you. I’ve definitely experienced that in my own life.
well if you take a $25,000 loan to invest in your small business but keep your day job and are able to repay $500 a month independently of how the business does you are in a similar position I was. It would be annoying to lose that money but you can hope for a nice reward
I knew nothing about investing in my 20s. Now that I am in my late 40s I would not consider debt to invest because I do not have many years left to fix it if it doesn’t work out. If I was married and had someone else to help pay the debt and share the worry burden I might try it.
You are so daring in everything you do. Where you encouraged to take chances and try everything as a child?
If “when you are 18 you are on your own to pay for college and living expenses” counts as encouragement, then yes! Also my mom helped me get a few jobs as a teen and they always allowed me to work through high school.
The way you used the debt is the only good way to do it: only use it for productive investments and then bust your little butt to get that debt paid off ASAP.
Well done! 🙂
yep, that would be the way!
Pauline, Your story is very inspiring to read and It is impressive at small age your were able to think and manage all the financial risks. You played your cards with confidence along with back up plans in place. Glad to know you achieved your financial independence by 30. I wish I would have read similar post many years ago. I am happy for you and keep going… I know you are aiming for bigger one at Guatemala, good luck
thank you Rita!
When leveraged properly and full understand of the risk you’re taking, debt can make sense. The biggest problem is too people don’t leverage to create wealth, but use it merely to create more debt, unfortunately. For me what is the most telling about your story is the you had “many back-up plans” and worked your behind to pay down those debts as quickly as possible, so you can actually see the reward. So many people are unwilling to do those things.
yes it is a sacrifice, I was paying most of my day job’s paychecks into debt or saving it to repay my private creditors a few months later, but I understand for many they don’t want to sacrifice their lifestyles to work several jobs and repay their debts.
Interesting topic. I’m naturally debt averse, but I wouldn’t be opposed to it if it was for investment purposes. Leveraging yourself can bring a lot higher returns, but they can also get you into some big trouble. Sounds like you were smart and it has allowed you to live the lifestyle you want at a young age.
worst case scenario I would have had to work longer but being single and childless I wouldn’t have impacted the lives of others.
Building wealth oftentimes requires risks including taking on debt to get there. Leverage can be a beautiful thing if it works in your favor but devastating when it does not. Good job, Pauline, for working hard and smart to minimize the risk of the debt you incurred to expand your wealth.
thanks! I know the risks but am willing to take them.
I love how you say that you were not afraid. The most successful people take risks and you can’t be afraid if you are willing to jump two feet into something.
Yes, sometimes you have to be really zen about it but I don’t invest money I can’t afford to lose either.
I’m not a big fan of using debt to invest. I am too risk averse. Power to you for making it work though!
With a family I guess my approach would be a bit different but so far so good.
The friend with the kids is a really good analogy. I’m not ready to buy a house in the least, but I do know that when I am close enough, going for it even if I don’t have a full 20% down but can afford the mortgage + everything else, then I should be prepared to jump in. Like you say, debt keeps you motivated!
It depends on your debt mindset, if you look at it like free money to make life easier you’ll spend decades to pay it off, if you are disciplined and motivated you can get rid of it quick and enjoy the leverage to build wealth.
You know my parents have rental units around the UK and it has paid off for them big time. They had to go into debt to buy them but over time they paid for themselves. Risky? Sure, but many people do that. I also sold my house for a few times it’s worth when I moved to Canada so to me that was a damn good debt to have lol. If I would have held on to my flat… well, let’s not go there how much money I could have made lol. What I’m trying to say is that I would go into debt to buy a rental property because I’m pretty confident in my ability to get it rented and have it pay for itself over time. You are right, I’d work even harder to make sure that it happened to.
I like real estate a lot as well, and would feel more confident investing in land or property with leverage than in stocks with leverage. At least with a mortgage you know roughly how much you have to pay every month, with stocks you can lose it all because you were over exposed and the stock went down 10%.
What a can-do attitude you’ve got Pauline – inspiring. I love the line ‘I went into debt to invest’. It’s exactly the opposite of what conventional financial wisdom says you should do – but at time you need to break with convention to move forward on your own path.
And I identify with your firend who is making more money now he has kids. I’m the same. So much extra money is needed to cover bringing up children that you just need to worker harder, smarter and raise your rates! Not that I’m better off – I make more to pay out more but it just shows what can be done when you really have to.
You do find extra strength when it is absolutely necessary, too bad we don’t put the same effort from day 1 when there is more breathing room in the budget.
Excellent post Pauline. A bold attitude and strong plan can serve a person well in so many areas of life. It’s inspiring to read about your path to wealth.
Thank you Betsy. I don’t mind risk and would try to go for the rewards as I bounce back easily from failure. Most successful people have failed dozens of time before so I am trying to follow their steps haha.
Taking calculated risks has made all the difference in our lives, Pauline! Opening a guitar/tutoring studio was very risky and kinda expensive for us. But 8 years later, we feel like geniuses for taking the risk.
Spending money to make money is one of the few maxims that stands up to just about any scrutiny. So yes, going into debt to invest may be the answer in some cases. And it is plain to see it worked for you. Have a fat cat Friday!
CJ, the fat cat gave me the flu! How do you even get the flu with 90 degrees outside? Oh well. You do need money to make money, at least a little, or a lot of time, and if you are sure about your plan, spending the money will save you lots of time. You could have given a few private lessons without a studio, lose time commuting from student to student and spend less but wouldn’t have the success and recognition you have today, and less money as you book less lessons going from home to home. Well done!
The flu!!! How miserable! Hope it passes quickly and that BF can comfort you with all the aches, pains, and various unpleasantries of the flu.
I know this one guitar instructor who goes house to house for lessons and he let’s the customer decide how much to pay him!!! What an asinine policy. Now, I know him well enough to know that he struggles financially and has an incredibly annoying personality. How can he afford these policies?
I used to make a few exceptions and go to a customer’s home, but not anymore. I politely explain that it makes no financial sense for me to pay rent at the studio and travel to their home. Plus I have been doing this for a while and I am in a position to be a bit more discerning;)
Hope you are feeling more yourself very soon, Pauline!
He’s been a sweetheart making me lemon and honey tea and I am starting to feel human again, thank you for your good wishes.
When I started tutoring in the UK I used to charge only gas money and go to people’s places but it was to build a clientele and because my house was full of roommates so not convenient either. It makes no sense in your case. And that pay what you can policy? Crazy. How can you know what you can afford next month if you don’t know how much you’ll get paid!
Pauline, I am always impressed by the authority in your articles, the sheer passion in your writing and the amount of feedback you receive through comments. Bravo!
I have never even consider going into debt to invest, in this particular circumstance. However I have weighed the options for investing, while I still maintain debt. The answer to that question was a resounding yes. However, I did have to look at the nature of the debt to really grasp how much and how often I could invest.
I noticed though that you have a similar outlook on loans: use them as a tool. You definitely don’t fear them. I think that’s pretty cool.
thank you for your kind words Scott. Not paying off debt to invest the surplus money is similar to going into debt to invest. I could have said that the debt paid for my living expenses while my salary was invested, in the case of carrying already consumer loans you don’t get a lump sum like I did but can use the extra cash flow monthly to try for a better return. With low mortgage and car loan rates that makes a lot of sense.
I’m all about taking risks while I am young 🙂
Having backup plans and not being afraid to work and great qualities for success!
Pauline,
These are great examples where using debt can really be the best choice to build personal wealth quickly. I also like how you had multiple backup plans to fall back on if things went wrong.
I guess it’s true what they say – with great risk comes great reward!
Hey, you seem to be a smart guy. You had such big plans while you were just 25. That must have also taught you how to wisely live your life, not just in terms of money. In fact, I too believe in debt for the purpose of investing and building wealth. It’s exactly like investing in stocks with high risks. If one has the gutsy muscles, he is sure to reach high.
I really like this story and I am fighting really hard to achieve something similar. I am 23 years old and I purchased an investment property last year. It has positive cash-flow. The problem is I do not have a salaried job so the bank wont count my income for their ratio. I really want to get another job that has a base pay so that I can purchase a multi-family home. I really like this story! You have achieved what I am fighting for. It gives me peace to hear of someone who lived frugally to become independent! Congratulations!
I’ve been reading many of your posts lately (also over on mmyw – my boyfriend may or may not have called me crazy 😉 and it’s so interesting and INSPIRING to read about your way of living, your success and about how you build/t wealth. Very, very good indeed. I used to be extremely bad with money but I’m working hard and might be able to afford my first property in around 12 months 🙂
Best wishes from Germany
Andrea
Hi Andrea, glad you enjoy my sites, and thank you for taking the time to say so. I know it is not easy to step out of the norm and decide to do something different but if that is something tempting for you, just go for it! There are many steps along the way that are not as crazy as your BF may think.
I can definitely see the benefits of using debt to build wealth but I shy away from all debt. I think everyone will need to consider their comfort level on going into debt.