The rule of 72- Not all debt is bad.
There are lots of opinions on this- I’m just talking about my views and not giving advice!
Somewhere in my life I got out of the idea that the goal was to buy a house and pay off that mortgage AS SOON AS POSSIBLE. In fact, by the time I actually bought my house, I assumed I would always have a mortgage payment.
There’s a difference between having true consumer debt- credit cards, trips, holiday shopping etc. These are debts that generally fund liabilities and offer no return on the money spent.
I’m a fan of using debt to buy assets that give you extra cash flow or create asset appreciation.
Using money by refinancing your home to get a rental property is a good example- it’s how I bought my first one.
Using money as leverage is certainly not new, but in today’s highly sophisticated financial world, this may be the only way to ever get ahead. Learning how to use it responsibly and not be afraid of it is the first, and most important step.
In fact, just understanding how the money you have in your bank is actually decreasing in value because of inflation every year is critical to understand.
So what is the rule of 72? It’s a simplified formula to determine how long it will take for your money to be worth half- 50%!- of its value. Meaning if you have $100 you have today it will only go as far as $50 in a certain period of time.
To figure this out, take 72 and divide it by the current inflation rate. So, in 2022, when inflation was at it’s peak of 8%, your money would be worth half in 9 years. Crazy.
Using good debt helps balance this out- you buy assets that appreciate in value because of this inflation to offset the loss you’re taking on the actual cash.
The interest rate was held at 5% by the Bank of Canada today. We’re going to see rates hold in early 2024, then start decreasing. This will prompt more demand in the economy for everything, including real estate. We’ll have an upturn in most property sales.
I’m hoping to use some debt to buy another investment property this year- I’ll keep you posted on how it goes. Good luck out there.