“You can get past the dead end. You can break through the ceiling. I did and so have countless others.”

Finance Tip Friday #31: Leveraging Debt to Battle Inflation

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I am an advocate of having a minimum amount of debt in your life. Most debt is bad. Most debt does nothing more than enslave you further. When you are in debt, you are forced to stay in a job you hate because you know that monthly payment is just over the horizon. You are forced to abide by the system. But utilizing debt to accelerate your wealth and to battle inflation is a worthwhile strategy.

Remember, there is GOOD debt and there is BAD debt. THIS article goes over that. Essentially, obtaining debt to purchase assets that appreciate in value and generate cash flow is good debt. For our purposes, this is predominately going to be loans/mortgages on real estate that generate income and appreciate over time.

So, inflation is RAMPANT right now. It is the worst it has been in half a century. We are talking about inflation numbers approaching 10%. This means that 10% of your savings are losing value. One dollar 6 months ago is worth 90 cents now. It is pretty bad out there, especially when you account for nurse practitioner salaries staying stagnant…

One strategy to battle inflation is by obtaining debt to purchase valuable assets. You are buying those assets with debt in TODAYS dollars, not future dollars. Inflation really doesn’t matter to you in this scenario. Here is an example (using simple numbers):

You purchase a piece of rental real estate for $100,000.

Your mortgage payment is $1000.

You rent it out for $1000.

Basically, it is a break even. You are not making any money, but the debt is being paid off.

Fast forward 10 years from now:

The piece of real estate is valued at $150,000.

Your mortgage payment is still $1000 (this has not changed… it is based off money 10 years ago).

You rent it out now for $1500.

Now you are paying off the debt and making $500 a month.

Essentially, you are paying off OLD MONEY with NEW MONEY. Inflation has made the value of the dollar less, but the debt you owe has not changed.

I remember an older couple I knew who owned a house easily worth $400,000 yet their mortgage payment was only $500. Why is this? Because they purchased the house like 30 years ago… When the value of that house was only $80,000. They could EASILY rent this place out for $2,500 a month now. They beat inflation and didn’t even know it.

By purchasing cash flowing and appreciating assets NOW with TODAY’S dollars, you are battling future inflation because the value of the dollar will continue to decrease over time. This means it will cost MORE to purchase goods and services in the future, including rent. You can safely assume that you will likely be making more money in the future to account for inflation, but the debts are being paid off at valuations in the past which will not account for present time inflation. I hope this makes sense as it is critically important if inflation concerns you and you want to preserve your net worth.

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