BiggerPockets Money Podcast - Do You Need Debt to Reach FIRE? How to Use Leverage to Build Wealth

Episode Date: November 12, 2024

Is paying off debt or investing (and potentially using more debt) the best way to reach FIRE? The average American has $104,215 in mortgages, student loans, credit cards, and other debt. Where do YOU stand? If the end goal is FIRE, you need a game plan for your debt, in which case this episode is for you! Welcome back to the BiggerPockets Money podcast! Not all debt is bad. When used responsibly, it can be a powerful tool that allows you to buy appreciating assets and hedge against inflation. Today, guest co-hosts Kyle Mast and Amanda Wolfe join our panel to share their thoughts on debt. We’ll share how much debt we each have (ranging from zero to millions), how our philosophies on debt have evolved, and how debt can ultimately help you reach FIRE. But that’s not all. We’ll also discuss the types of bad debt that could derail your FIRE journey and the investments you don’t want to be stuck with during an economic downturn. We’ll even get into the most important financial protection against debt risk—savings and reserves—and why these funds should grow proportionally to your debt! In This Episode We Cover Paying off debt versus investing (and which strategy is best for FIRE) Why well-leveraged debt is one of the best long-term hedges against inflation The types of debt that could propel you toward an early retirement “Bad” real estate investments you don’t want to be holding during a market downturn The most irresponsible uses of debt (that you should avoid at all costs!) Why you should always grow your savings and reserves in tandem with debt How much debt WE have (and how our opinions on debt have changed) And So Much More! Links from the Show Mindy on BiggerPockets Scott on BiggerPockets Listen to All Your Favorite BiggerPockets Podcasts in One Place Join BiggerPockets for FREE Email Mindy: [e-mail] Email Scott: [e-mail] BiggerPockets Money Facebook Group Buy Scott’s Book “Set for Life” Find Investor-Friendly Lenders Pay Off Student Loans or Invest in Real Estate: Which Makes You Wealthier? Connect with Kyle Amanda’s Website   (00:00) Intro (01:23) How Much Debt WE Have (06:15) Paying Off Debt vs. Investing (13:46) Starting Your FIRE Journey (21:51) Debt Strategy 101 (31:38) “Unreasonable” Debt (38:23) Bad Real Estate Investments (46:48) Key Takeaways (50:18) Connect with Kyle and Amanda! Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/money-580 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

It goes without saying that Americans are in debt. The average debt in America is $104,215, which includes mortgages, car loans, credit card statements, and student loans. Debt peaks at age 40 to 49. And the largest percentages of the average consumer debt balance are mortgages. And I think a lot of people on the fire movement ask themselves, what should I do with this debt? And what debt should I be taking on? We're going to 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 Mindy Jensen, and with me as always is my quarter panel co-host, Scott Trench. Thanks, Mindy, great to be here together. You and I make 50 Cent. Did you know, actually 50 Cent has some great life and financial wisdom to impart on folks. I think there's two quotes in particular that stand out there. One is if you die in an elevator, make sure you press the up button.

And perhaps the more relevant piece of advice that 50 cent has is get rich or die try-in. So go check them out for more financial wisdom like that. You can find his albums on Spotify and anywhere music is sold. All right. With that, Bigger Pockets is the goal of creating one million millionaires. You're in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting, whether that's with 50 cent or with several million dollars in debt.

Today, we're so excited to be joined by Amanda Wolf and Kyle Mast, who I'm sure everyone is familiar with. If you have been listening to the Bigger Pockets Money podcast for some time, it's great to see both of you guys today. Great to be here. Great to be here. We know the average American has $104,000 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 going to start with you. Do you have any debt? I have $1.92 million in outstanding mortgages across our rental portfolio. I have a $0 mortgage on my primary residence. And I have a $16,000 loan on a Toyota RAV4 that I purchased two years ago.

And that is it. I have a small credit card balance I pay off in full each month, which I do not count as debt. I would say that I don't count that as debt either. Millions of dollars in debt is what I heard you say, Scott. But then you said it's across your rental portfolio. So that's not really personal debt. That's your business debt. That's Scott's rental portfolio business debt, wouldn't you say?

The question was, do you have any debt? So I was like, all right, well, I got to list all of my debts there. There's our five mortgages across five rental properties in the greater Denver area. I am very comfortable with that debt. All of that debt is locked in between 3.375% and 4.1⁄4%. So it's all long-term mortgages and it's reasonably lightly levered somewhere between, I would say 50 and 60%. Okay, so I approve of your debt.

Amanda, let's look at your debt load. I'm like, wow, it sounds like Scott practices what he preaches. So that feels very trustworthy. Mine is a little more simpler. I have no debt. I have the same as Scott. Like, I use a credit card for every single thing in my life, but I pay it off in full every month.

And I have no debt. Okay, so Scott is 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 Amanda, did you ever have debt? I did. I've had both loads of it at some point or another. I paid off my final piece of debt, which was my 2014 Ford Escape, which I'm still driving her today. I had like a 1% interest rate on this 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 it off as slowly as possible because my credit score had been in 846, and it dropped 80 points when I paid my car off my last, like, $300 payment. It did recover, but that was a sad day. Dear credit score, people, come on. Yes, literally. 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. Kind of. Amanda's got zero. Scott has millions. Where do you fall? I'm guessing kind of in the middle. Yeah, I'm probably lean more towards Scott. I'm into millions. I'm not going to give the exact

numbers that I've got. But it's on it's on mortgages on rental properties. And we'll talk about this later on 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, you know, that's a that's a kind of debt that I'm super comfortable with if it's at a good LTV to the properties and if we've got good cash flow on the properties and reserves savings to cover things that come in that are unexpected because that always happens. But I've had, you know, I've had student loan debt in the past. It's been paid off. Never had any credit card debt. You know, and we can talk about vehicle debt too. I do have some vehicle debt. Mindy, tell us, let's just jump to you. What do you got? I have mortgage debt and I have a

line of credit against my after-tax 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. I did have a loan for a zero percent interest loan for my daughter's braces that I just recently paid off because she got her braces off. 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. That was really interesting to hear everyone's different takes on debt here. So, Kyle, I think we're going to have a lot of similarities in terms of how we think about these things. And that's going to be a fun discussion here. I'm super interested that you're essentially debt-free, Amanda. And Mindy is discarding her mortgage, which I would be, I would feel way, I like love having a paid-off primary and I feel debt-free, even though I've got the millions of dollars mortgage that I talked about previously because I don't have to pay for my personal home on there. Like if I ever had a problem with rentals, I'd just sell them all is the way I view it. So anyways, let's talk about when we first started out on our fire journeys.

I want to hear from folks about whether you prioritized paying down debt or whether you prioritized focusing on investing and what influenced those decisions. And 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 it 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. And you're like, oh, yeah, that's the thing I've been chasing. So for me, you know, I grew up really, really poor. So when I finally graduated college and I got my first, you know, big girl job, I thought I was rolling in the big bucks and definitely did not have a grasp on how. how many works at all. So I had a bunch of student loans, but I also knew that I was supposed to be investing in my 401k, but then I was also spending more than I was earning because my salary was like, you know, $37,000. So at the time, I was just kind of throwing a little bit at everything. If you've seen that meme where the house is on fire and she's trying to throw 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 at the credit card. I'm putting a little money into the 401k. I'm budgeting sometimes. But it was, I would say about a year into my first like corporate job that I really started sitting down and thinking like, okay, I need to come up with a plan because it seems like 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 freaked me out, which if I could go back in time, I would take back because my student loans were like 3% interest. So I didn't. need to knock those out in like six years. So I'd probably go back in time and deprioritize that

and instead invest 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 debt, 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're 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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I started listening years ago to make better use of drive time and workouts, and it stuck. At this point, I've logged over 229 audio book completions on Audible alone, and I still regularly re-listen to the highest impact titles. Lately, I've been listening to Bigger Leeners Stronger for Fitness, the Anxious Generation for Parenting Perspective, and several Arthur Brooks' audiobooks that have been excellent for mental well-being. What makes Audible so powerful as its breadth. Beyond audiobooks, you also get Audible Originals,

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Kyle, let's do you next. Yeah, starting now, I was kind of one of those, I don't know if you'd call it a weird person, but like when I was in college, I was out of state for college. I'd go through the airport and I'd buy like a personal finance book every time I went through one of those book shops in there. And, you know, one of them is the total money makeover by Dave Ramsey. you know, the David Bach, what is it, Millionaire. I can't even remember it. Millionaire Next Door is one by Stanley, several of those books. So I had all these things going through my head,

kind of like Amanda, like, what do you throw things at? But I think I landed on the Dave Ramsey thing early on. And one of the things that really influenced me was when I got married. And my wife was basically, I've said this before, kind of like my venture capitalist and me starting my financial planning firm. Like I made nothing. I had no clients. And she was just, just my sugar mama. She had a real job and she was making things and she hated her job. And the goal was to not have her work that job anymore. Go part time help 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 she maybe liked more. So our goal was knocking out every payment we had. And that was student loan debt. And that was a little bit of a cart debt that she had when we got married. Just everything. And that, I can't remember how many, a few years it took us to do that. We lived super, super lean. 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 rate student loans. And the freedom, you know, I'm in that stage of life, the freedom. feeling of that, I'm in the Dave Ramsey camp. You 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 outlay, that was the right decision. And I'd do the same thing. Absolutely again, same way. All right. Mindy, I know you have a lot of depth here to your answer, but could you tell us about

your situation, about how you prioritize this? 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 early? And then up pops Mr. Money mustache. And he's like, oh, that's interesting. So that, you know, created the rabbit hole that we dove down into. And we discovered that we were already on the path to financial independence. We just didn't know that we had been saving for stuff. We were saving for the future. So we kind of prioritized a little bit more. We focused on what our expenses were and we focused on being able to invest more. We took some investment risks. We were heavy into tech stocks. We didn't do anything

about index funds because we never heard of them. I don't remember when we first started investing in index funds, but it was probably a decade after we started our finance journey. Scott, how about you? Did you prioritize paying down debt? Well, clearly not because you think millions of dollars in debt is the best way to go. Well, I started my journey basically broke with a couple thousand dollars, which is a huge privilege because I didn't have student loan debt or any of those types of things to get going. And when I started my career, I needed a car. So I bought a brand new then 2014 Toyota Corolla. And I 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 2007 Toyota Corolla that was much cheaper for it. That was, yeah, that's how ridiculous I was and am in a lot of ways on that. So that was a big part of it. I had that loan at 1.99% 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 a large degree. But I had no problem the next year taking on a several hundred thousand dollar mortgage for my first duplex house hack because I just viewed it completely differently

in the leverage and how that was. an investment on that front. And I essentially have never racked up any type of personal debt whatsoever in my life. Again, good fortune. I'm very, you know, very privileged from my upbringing and had to have college paid for, but I've only ever taken out loans for rental properties or my two car purchases. So I'm hearing you say you prioritize collecting debt instead of paying it down, but for a good reason. Yeah. The 30-year fixed rate Fannie Mae insured mortgage, that is at three, but four and a half percent is, like, to me, that was just like an unbelievable window of opportunity. And I tried to take advantage of it, not to the point where I couldn't

sustain it or was in way beyond, way in over my head, but to take advantage of it in a way that would have a really meaningful impact on my life long term. So I plan, I think that holding those and never paying them off will be a big advantage for the next 20 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. Scott, would you recommend somebody following in your 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 debt? Look, I think that if you're starting from scratch and you want to get to financial independence 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 has always been the most obvious risk in that world is in a house hack. There's just not a lot of other great options like that. You might take an SBA loan, too, if you're really interested in the business buying route or entrepreneurship. But at some point, you have to take a risk. Otherwise, the brutal reality of saving, you know, making 50 grand, saving 10 to 20 percent of that and investing it in the stock market will just need to compound over 30 years. Yeah, I think I'd largely pursue it the same way that I did to that effect. I think that one of the things that's bugging me around this is the mortgage debt and the personal debt. And I never really had to face that situation because of the way I

approach my house hacking career in life. But for example, I have a savings account with my emergency fund, which has more than the balance of my car loan of 16 grand, which is an interest rate of 2.5%. And the interest rate I get on the savings account is like 4%. So it's all simple interest, and it's all incremental. So it's all tax at the highest relative bracket that I'm in. So am I really getting a spread there by not paying off the Toyota RAV4 loan? 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 deductible. So it's a no-brainer to keep my interest rates and my mortgages,

my rental properties at the three and a quarter at a four and a half percent range. And it's kind of a toss-up the way that I've managed my money personally about whether I should even have the car loan. So that framework, I don't think, was something I had thought through previously. And I think that if my car loan were at like four or five percent, I would probably pay it off rather than keep any, like there's no point in having the extra money in the savings account earning four and a half percent when I'm negatively arbitraising as a spread between that and the car loan, for example. So that's probably the only like difference I would be thinking about or, you know, ideas I would want to put in someone's head who's listening to this 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's the math answer and I think there's the feelings answer. So the math answer could be like let's put it in a spreadsheet and see what makes most sense for you. If you have a super low interest rate on these other loans and you're 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, oh, I only have a 3% interest on this thing. So that's great. I don't need to rush to pay it 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 Scott was saying even with his savings account. So I think there's the math answer where you can sit down and say like, okay, am I earning more interest on this money versus what the debt is costing me? So that's the math answer. But then there's also the feelings answer, which is how does the debt make you feel? So Mindy earlier when you were 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 were 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 repoed when you were a kid or like you didn't have somewhere safe 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 it just might feel better. So I think it totally.

depends on the individual and then their own experiences with money. Amanda, 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 debt's bad. You should pay off everything. But if you grew up financially insecure and having any sort of debt at all gives you the hebie-g-g-bees, then Scott and I tell us, you that you shouldn't pay off your mortgage because it's only a 2% shouldn't be something that you're 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 debt-free and, you know, live by Dave Ramsey's mantra 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's situation is so different. And this is something that, you know, if you read any decent personal finance book, they will have a second or an hopefully large section on behavioral finance. You know, everyone behaves different. There might be the wrath or the wrath. There might be the math answer, but there's 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, figure out what their goals are, what behavior will get them there. And it can be totally different for different people. 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 know, like how I started out just knocking dead out really fast so we could get my wife out of a job she doesn't like. That was perfect for us. That's not going to be perfect for

everyone. Someone who, you know, ideally, you know, the math thing would be house hack, do it again, house hack, 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 everyone's situation or their goals even. So I don't have, I don't have a specific, like, recommendation for people. What I would say is that 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 sheets, their own debt, their own behavior, the wealth that they built. My idea of what risk was and what debt, the risk associated with certain types of debt, in line with things like inflation, really got influenced. And I think, you know, I'm a different person from a financial viewpoint standpoint now than I was 15 or 20 years ago by far. So just know that 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 certain strategy that works well for you at a certain point

in your life, don't expect it to 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, like, if you have to restart or change course later on down the line. So that's a terrible answer. I'm sorry. I have no specific way to start. I think that's a great answer, Kyle.

And yeah, like, I completely agree with that, right? I would never today put 95% leverage against my entire net worth to try to get to the next level. But like, I absolutely would do that again if I had 20 grand and was trying to get started by my first house hack. So it just seasons of life and it's 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.

Let's talk about that concept that you just brought up, Kyle, here, how debt strategy changes as you get farther along on your fire journey. And Mindy, I'd love to hear your approach. How did things start out and how did it evolve? Well, how it started out is that I had no debt outside of the mortgage on my primary property. And I'm sure during the course of 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 6, 12 or 24 months. So I was taking out 0% interest loans on building supplies. And then I tried really hard to get that 24 months because I'm going to sell the house in two years.

I could, if I timed it right, sell the house and then pay off the debt and pay no interest on that. But again, because it's a 0% interest rate, because I had the money to be able to pay it off if I had to, I didn't consider that to be debt. I have changed my debt strategy a little bit in that we took out a line of credit against our after-tax stock portfolio. I think it's called an equity line on your stocks. at one point the the line we had this much margin

between what we owed and what we owned and then we watched that margin goes smaller smaller smaller smaller and we're like uh maybe something's going to happen so we took out a home equity line of credit on our primary house

just in case something happened something did happen we had to throw money at that 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. That was a bit of a, hey, I really don't like debt scenario. So now we've started thinking of ways that we can pay down that that margin loan faster. Margin loan, that's what it's called. But for the most part, we are not going out and acquiring extra debt, you know, just for funsies. And we always pay off our mortgage,

our credit cards every month, regardless of the balance. And that's never going to change. How about you, Amanda? I feel like mine has changed as I've learned more. So, you know, I mentioned in my 20s, I was just so scared of having any debt at all. So like I said, I rushed to pay, you know, I realized I was creeping up a little bit on my credit cards. nothing crazy like a couple thousand, but I was like, that's still a couple thousand that 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 it was really, really scary. But now that I'm in my 30s, 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 Kyle was saying earlier about seasons of life because I'm sure probably in my 40s and 50s it will look even different. We heard a little bit about it from Kyle. I don't know if you have anything to add based on your previous response to the last question. But any other color you'd like to add, Kyle? 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 sheets, the people that had things like real estate or a decent size stock portfolio, the long-term hedge that was. So I didn't work with high net worth clients. I worked with like middle America as clients. So these were people, some of them, Social Security was their chief. of income with like maybe a $50,000 or $100,000 IRA that was their backstop where they take a little bit of extra money from. And that, even though Social Security, you 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, it does not. And not having that good hedge 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 the puzzle. And, you know, 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 30 years fixed. And I was just trying to push everyone as fast and far as possible to refinance current loans to lock those in place. And I don't think we'll ever see that again. Like,

I think that is just gone. So that's one thing. Like, that's a hedge that you can put in place. And if you've got cash flow 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 the cash flow of the business, that is a good way to hedge. your debt and hedge your financial situation in the long run rather than just trying to, um, you know, steer clear of debt completely because debt well, uh, how do I say this and not sound like I just want everyone to go into debt? Well leveraged debt with good reserves to back up if something bad happens. Reserves means emergency funds is one of the best ways to hedge

against inflation in the long run. And I also think when you're younger, 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 podcast, Joshua Sheets, it's another one in the world here. This is something that he's changed his 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. And sometimes it's good to learn those. 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, you know, this word risk, you know, it's all built around risk. 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 nuanced on 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 our final break, where we're going to break down the irresponsible ways to handle debt and what you should not take on and how that could impact your fight journey. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing.

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and 50 cents an hour. Employees also have the opportunity to grow their skills and their paycheck by enrolling in free skills training programs for in-demand fields like software development and information technology. Learn more at about amazon.ca. Let's jump back in. How about you, Scott? Did your debt strategy change as you got further down the financial independence journey? Yeah, I think once again, I'm going to find myself really aligned with Kyle.

And I'm going to just kind of reframe a few things that he said in the way that I think about it. It's the same same bot process, just a different way of spitting it out from my view. You know, when I got started on the journey, it was I didn't have any wealth. So I needed some wealth to protect. And that's where I had to lever. I real estate was the tool. But if I just, if you take away the leverage, real estate is a definition. It's a third of the CPI.

It is inflation, housing cost, right? And in a very literal sense. And so you buy a couple of, if you have a couple of paid off properties, you have a 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 adjusted portfolio? And that's where just like Kyle said, it's a stock portfolio, it's a real estate portfolio.

And over time, that will that real estate portfolio will de-lever and it will just preserve wealth in line with inflation, preserve an income stream that should be, by definition, again, in line with inflation. And that's the way I think about it is there's, like, there's no point in pacing with inflation if you don't have any wealth to, you don't have any wealth. You have to get ahead of it somehow by earning a lot, spending very little and investing in a way that can outpace it. And once you're, as your strategy evolves, it hopefully you begin to approach fire over the years and decades, then it becomes about preserving wealth there. And debt just amplifies return. and or amplifies risk.

And so it's just where can you layer that in to move faster? You never want to get in over your skis. 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 hearing me and Scott talk, I'm just hoping we don't lose anybody here too. 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 not, if you're not comprehending it, I would definitely look into it more. 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 it happen at a certain point and then subtracts money to make it happen a certain point. So it's just it's just the, the ocean we're swimming in. So understanding it a little bit is. is super important to be able to keep pace, even just keep pace with living expenses when

wheat thins now cost $57 for 10 wheat thins. It's just, it's really important stuff. You know, I think that it sounds like there's a general agreement around avoiding consumer debt. We didn't even talk about super high interest consumer debt. This is bigger pockets money. We assume that that's a given at this point. But there, I think, are bounds for what's responsible, what's reasonable relative to debt and, you know, the alignment that it 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'd love to go around the horn here and hear what you guys think about what's reasonable and what's not when it comes to debt. And Amanda, I'd love to kick it

off with your thoughts on that. Yeah. So, you know, earlier I was talking about how there's the math answer and the feelings answer, right? So on paper, what makes the 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, you know, in the 20%, maybe even 30%, 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 a lot of girls out there are like, I'm in my credit card debt era, screw it, I'm going to Lulu Lemon, Sephora, I'm getting all the goodies. And I will worry about this later. that could not be a poorer choice. It 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 trend. I think it's very irresponsible. And so when we think about debt, like I said, there's the math and the feelings, but they do converge at a certain point. Mindy, what do you think? First I want to, uh, over-enunciate what Amanda just said. She said, I don't think this could be a poorer choice.

I want to make sure people didn't hear her say, oh, I don't think this is a poor choice. It could not be a poorer choice. You could not make a worse choice than getting in massive debt in your 20s at this 20, 25, 30 percent interest rate. I don't even understand how credit card companies are allowed to charge that and not be subjected to usury laws. But either way, you are making such a big financial problem for what? A pair of leggings? some makeup? Is that what Sephora sells? Yes. Skincare makeup. Yeah. You know what? Target sells the same thing at a whole lot lower price tag. And how many pairs of leggings do you need? You need one to go to the gym today

and one to go to the gym tomorrow while you're washing the ones that are dirty today. Or you could reuse those. I've done that before. But you know, wear them twice before you watch them. Love the Violet agreement there. Kyle would love your thoughts on this subject as well. Oh, I'm in the same camp. I worry that, you know, we went through this episode and we talked about some of the good aspects of debt and how to do it responsibly. But I'm loving that we're kind of summarizing it here, that there are some major ways that you can just get into trouble. You know, like buying things that don't appreciate in value in general, you know, like buying a hamburger and paying it off over 25 years, not a very good idea. Like that's, so that's the biggest thing. You know,

if you can just like buy things that appreciate with debt, that's maybe a rule to put in there. there's other rules along with that. But if it doesn't appreciate in general, don't buy it. And again, you know, something that has 20% interest, a credit card, it is just you're signing yourself up for servitude in the long run. The thing that I would just add on is the importance of savings and reserves, the importance of stopgaps when you do take on responsible debt even because you never know what's going to happen.

You don't. So like in my case, with reference. properties. You don't know when a tenant's going to give notice and move out and you're going to have to renovate a unit. It's going to take three months or four months to get someone back in there. You don't know. That just happened to me yesterday. I got to email one of my properties. A long time tenant is moving out. Probably going to have to do some expensive renovations on the property to get it listed, get someone back in there. They're moving out in the middle of winter. It's going to be spring almost probably until we get somebody in there. But 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 getting any rent on, but that's built into the pro forma of the property that's built into the savings. That's going to happen. So anytime you take on some sort of investment debt, I mean, if you want to sleep good at night, have a whole bunch of reserves, like have a savings account, have also have like a Roth IRA, have, you know, it's any other account that also is just liquid, even if it's in the stock market and it goes down by 30 percent, there's still something in there. and you can get to it. So just, you know, have those reserves as you're in, you know, like in the real estate world,

as your properties increase, if you're someone who likes to have a certain amount of healthy leverage or debt on them, continue to increase your reserves proportionately. Don't get ahead of your skis on that. 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 if, I don't know if this will like fit in. But regarding the credit card debt piece of things, I thought this was something that everybody knew.

But after kind of like looking at the comments and these TikTok trends of these girls, you know, who are in their credit card debt era, when your credit card gets closed and it's sent to collections or whatnot, it doesn't just disappear. It literally follows you for life. So don't get caught up in, you know, some of the TikTok trends are like really, really. cool and inspiring. This is not that. This is not cute at all. So I just wanted to call that out that don't get swept up in like the herd 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 and pay that card off. Yes. Your decisions, no matter what they are or 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 haunt 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 won't, that you will pay more down the road for your credit card spending season. It'll hurt. I have two reactions to what's irresponsible thing here. And I'll start by saying what I'm not going to talk about is the taking out credit card debt to buy Sephora because, you know, that's that's so far out of left field like we're not we're not like we're not no you should not be doing that in general sense i think we're all aligned on that i think that where i when i think about debt

there's two things that i think people are getting into trouble with in the real estate world in the bigger pockets money world and one of those is you know you heard my debt balance earlier some people went and took that to crazy extremes so even you know if it's multiples of your income in a way that is that is so far out of hand for you to deal with. It's not, it's all acquired in a relatively short term basis and you're going all 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 estate's a great bet or many asset classes are a great bet over the long run, short term volatility can be K you and the goal of the game is to keep things compounding for a lifetime and you eliminate

the compounding when you go BK. And we're going to see some real estate investors. and some real estate investments going BK in the next few years. We've already seen it in a couple of cases. And there's a limit and you need to know what that is. My loans were accumulated over a decade, one property at a time every two years-ish. So that's one. The second thing that I would call out is a mismatch between the use of the debt and the asset you're going to hold.

And my favorite example of this is the HELOC. when people, when you take $60,000 out for a HELOC and you use it as the down payment on a $240,000 Midwestern rental property, you got to pay back to HELOC. That means a heloc's a short-term loan. So I don't know what your definition of a short-term loan, but it's probably less than five years. That's $1,000 a month. And not a lot of mid-term, middle, Midwestern single-family rental properties are spitting out $1,000 a month in cash flow after $180,000 in mortgage debt to help you.

pay off the helock. So that thing's going to suck a lot of cash out of your life over that. And the reason that's happening is because you've used a short-term debt instrument to finance a long-term down payment. And people got away with this over the last 10 years and they're not going to over the next five years. And that's a problem that I, like a risk that I want to call out as a mismatch. Use the map the tool to the use case if you're going to use debt from an investment standpoint. So those are the two things I would call out that I think are I'm seeing that are fairly risky out in the investing world in terms of use cases for debt. Scott, 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 debt, I feel like you just articulated that so well. Yeah. I think, you know, and like, do I feel like if I had bought all that at once and was a higher LTV, I'd be pretty uncomfortable. But having stock pouted it very gradually over 10 years, I feel much more comfortable

with it. And I think that changes the perspective. of, I don't know, Kyle, if that's how it went for you as well. Yes, very similar scenario. I had a bump in there where I bought more because I, but I also sold a business. So it's just, it was, that's more not really buying. It's more of transferring one asset to a few other assets. But yeah, I totally agree.

You know, you spread it over time. You've talked about it before, dollar cost averaging into properties over time, just like you would stocks and even dollar cost averaging into good mortgage debt over time. And over time, you know, locking in long-term fixed rate debt and having a spread of cash flow over what your property requires and a 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, you usually have one employer where you're trying to make some money and then you buy rental property.

Now you essentially have two employers, one that's also paying you just a little bit. If you can build more employers over time, you're reducing risk as long as you're not taking 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 at it for a while, you have those reserves. I'm just pumping the reserves thing here. I just think that is just a big, big deal. And Scott, you touched on it, I want to push it 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. But if you go out when it's down, it hurts. It hurts really bad. Scott, I was teasing you at the beginning with your millions of dollars in debt. But then you said they're 50 to 60 percent leverage.

right? Yes. So there's there's a good amount of buffer in there, right, on some of those. And that's been puts and takes over the years as you buy in 2014, things go up and you refinance in 2021 when rates go down. So there's a lot of, there's like puts and takes that go over there that have changed that leverage ratio over the years. But right now, I'll also call out that because, you know, I, like, I'm not going to refinance any of these properties. And I'm not going to sell them because a long-term bet on there. And I wonder how I'm going to finance the next property, maybe via an assumable or seller finance thing, but probably with just cash. And I might go to a cheaper market as part of that as well, given the current higher interest rate environment.

The point that I wanted to make is that you've got 50 to 60 percent leverage. I'm seeing people saying, oh, take out as much as you possibly can. When you're buying properties, buy it as a house by it with the owner-occupied mortgage, which you can get for as little as like three to five percent down and live there for a year and then move out and do it again and again and again. So you've got properties that are leveraged between 95 and 97 percent. And that's kind of a one-way ticket to losing Kyle Mask's game of staying in it. And 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 Kyle'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 want to stay in the real estate. 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 long term, you have to do it intelligently. For a long time, the more you bought and the higher leverage you bought it at, the more money you made. And that worked for 10 years. And I was sitting there like, am I a fool? And I just sitting here watching all these other folks get super rich, super quick. And if I had just bought more and gone way more all in, I'd be way farther ahead. 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're forced to. And that can, that literally in some cases translated to individuals buying over a billion dollars in real estate, which is now worth 600 million. And that's a huge problem in some cases for that, especially when you're financing it was $600 to $700 million in debt and using a lot of other investor capital. So those problems are coming home to roost in here and will be a facet of the economy, even though the long-term investment in real estate, 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 your tenant leaves and you don't have another tenant.

That happens. That is going to happen to every single person who is listening to the show who has real estate 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 a new one. And you might not be able to find them for a while. So you need to be able to float that. And when you can't float it, that's when you have to sell. It always happens in a down market.

It's Murphy's Law. That is like the way it goes, it rules real estate. So just be intelligent about it. your investments. And also, Scott, maybe you could have had but trillions more in real estate 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 Kyle. I always love it when I get to talk to Amanda. And I get to talk to Scott all the time, but I always love that too. So Kyle, do you have any last?

bits of advice for our listeners. No, I just, I would encourage people to try to not get overwhelmed with everything that we talked about, you know, like the fear. And we're talking a lot about rental properties in here too. And it's not the only way you got to go. Like, you can keep things a lot simpler. 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 on a whole tangent on taxes that we didn't factor into a lot of the risk and calculation of this stuff. But you can keep it a lot simpler than what we're talking about here. So if anyone's feeling overwhelmed, you know, it's not, the main money habits that will get you to your financial independence

goals still stand, no matter if you're taking on leverage in a good way or totally steering clear of it. You'll, you can still accomplish what you're looking to 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 stat that just came out. Investopedia did some research recently that showed that the American dream costs $4.4 million, which is $1 million more than the average American earns over their entire lifetime. And when I saw that stat, I was like, that blows 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 do the house hacking thing, 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 work your 9 to 5, put money into your 401k and your Roth IRA, work until you're 65, spend time with your kids on the nights and weekends and call it a day? Like take a step back and try to figure out 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 to it to be if you want to earn as much as possible and retire as early as possible. But what is that American dream for you? Take a step back, figure out how to actually get there. Yes. Okay, Scott. Yeah, I think my key takeaways are, you know, use debt 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 avoid it in most other cases. Last parting thought I'll leave on top on that line is, And we've discussed us multiple times on previous money episodes. So if you're a regular listener, please forgive me for restating this for the umpteenth 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 $60,000 or $70,000 a year in income with a paid off mortgage is a lot easier from an investment portfolio standpoint than producing $120 if you have to pay that mortgage payment, for example, if that's what's going to add in there. I guess that's two big numbers. So 100,000 and 100,000. 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 favor of paying off debt early once you get into the upper echelons and begin getting closer to the end of the fire journey.

Yes, yes, and yes. Okay, I just agreed with all three of you. I can't top any of that because you guys are just amazing and I'm just going to leave that. Kyle, where can people find you online. Oh, not on social media. I usually don't hang out on social media anymore. I have a website, Kylemask.com. Sometimes I do some writing there, but that's about it. Most of 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. Shewifle Wall Street, Wolf with an E, my Instagram, or shewolfoWallstreet.com is my website. Got lots of good freebies and I do some writing there too. And you can find Scott and I all over biggerpockets.com

where we teach you how to invest in real estate the right way. All right, that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. She is Amanda Wolf. He is Kyle Mast and I am Minnie Jensen saying tuteloo canoe.