Tag: BiggerPockets

Using cash or using debt?

Are you a “cash” only person (like Dave Ramsey) or do you prefer to utilize debt on your behalf?

Honestly, I see the pros and cons to both sides. Being more financially risk averse/conservative, I get the appeal of only using “cash” (or, even if I’m putting it on a debit/credit card, only buying what I can afford to pay at that very moment). It’s a safer position from the standpoint that you aren’t going to get yourself into massive debt. This strategy makes a ton of sense for those trying to minimize spending on things they don’t need (mostly consumer products that contribute to lifestyle creep).

But if you leverage debt to buy assets (like real estate), where someone else is paying the loan down for you, you can scale much more quickly.

Imagine wanting to buy a rental property. Let’s say you’re looking to buy a single family home for $120,000. If you have to pay cash for it, it will take you a long time to save up $120k. Even if you’re investing it, unless it’s in a self-directed IRA, when you pull your money out to purchase the property you’ll get hit with taxes. But if you only had to save up $30k (for a 25% down payment on an investment property) or even $4,200 (for a 3.5% FHA loan, where you have to live in the property for at least one year), you can get started much sooner.

Leverage works both ways. It can help propel you to success or drive you into the ground. But as long as you’re taking on appropriate risks (preferably starting small unless you have a ton of experience and expertise in what you’re investing in), you can build wealth at a greater pace by leveraging debt as opposed to paying all “cash” for everything.

What are your thoughts/how do you prefer to invest?

How to be financially prepared when things go sideways

The difference between an emergency fund and a sinking fund, as illustrated by The FI Guy. ​
The difference between an emergency fund and a sinking fund, as illustrated by The FI Guy.

Most financial experts recommend having at least 3-6 months of expenses set aside as an emergency fund. This is used for true emergencies/things that you weren’t expecting (like a job loss or car accident). Hopefully these things never happen, but if they do, at least you’ll be covered. If you have to dip into your emergency fund, re-supply it as soon as you can to get it back to where it needs to be.

The “sinking fund” is something not as many people know or talk about. This is for known future expenses. For example, if you’re a 1099 self-employed individual, you better be setting aside money for taxes, because the tax man comes around every year to collect. And guess what? The car you drive? It will need an oil change and new tires every so often. Christmas and birthdays? They come at the same time every year, so if you plan on giving gifts, you should put money away in a sinking fund to cover those expenses.