When Are You Over-Leveraged?

I got a question on my blog when I talked about leverage – leverage of other people’s money, time, and talent.  (Leverage really is the only way to true growth in life.) Now this great question was: “Can’t financial leverage be dangerous? How do you know when you’re over-leveraged?” Yes, financial leverage – using debt to acquire education, open a business, or acquire capital assets such as Real Estate, can cut both ways. The type of financing you use for those is key. Short-term financing, variable-rate financing, and financing with a call provision (the bank can call the loan due at any time) are dangerous and should only be used in unique situations where the borrower has the ability to pay it off quickly and relatively easily. Longer-term financing with fixed interest rates, amortized over the longest time possible, is good debt – when you’re investing in yourself, your business, or Real Estate. Consumption financing or consumer life?  No, I’m not talking about those at all – those are things I take a Dave Ramsey stance on. How do you know when you’re over-leveraged?  Well, there’s a difference between investing and speculation.  That’s where people get confused.  If you’re investing in yourself, it means investing in the right education. The marketplace dictates everything. It doesn’t matter how smart, hard-working, or skilled you are – if you get a degree in something that the marketplace won’t pay you well for, that’s not a good reason to leverage debt. There’s a big question today whether professional schools (like dentistry) are worth it when students are coming out $250,000 – 500,000 in debt after 8 years of college.  It can still be done, but not with the ease that it could be done 20-30 years ago. With Real Estate investments, most people should avoid the more volatile, higher-risk types of properties.  Look for safe, stable investments, with a longer-term fixed mortgage, amortized over a long time period to protect your cashflow. Cashflow is everything.  You always want to leverage in something that produces cashflow – that you can reasonably expect to continue producing dollars for you. For example, single-family houses in good economic areas are always in demand, and people will rent them no matter what kind of marketplace volatility is going on. In Freedom Founders, we go into these areas in depth.  We build up our members’ financial acumen so they can really understand where they’re putting their money, and where it’s safe or risky. If you don’t have the constructs to make those decisions based on your own risk profile and goals, you need to get them.  There are many places where you can do that. (If you apply to join Freedom Founders, we’d love to talk to you!) Otherwise, get your education, read books, and become invested in other people who have already gone down the road you want to travel. To sum up, yes, you can become over-leveraged – but it’s because you’re speculating rather than investing. To your freedom! David P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think) : 1. Get Your Free Retirement Scorecard: Benchmark your retirement and wealth-building against hundreds of other practice professionals and get personalized feedback on your biggest opportunities and leverage points. Go to www.FreedomFounders.com/Scorecard to take the 3 minute assessment and get your scorecard. 2. Attend A Workshop: If you’re committed to Freedom, but still building a practice, paying down school debt,  or growing investment capital, our hands-on Freedom Blueprint Workshops are your entrance ramp onto the fast track! Visit www.freedomfounders.com/workshop to claim your seat! 3. Apply To Visit The Mastermind: If you’d like to join dozens of dentists, docs, and practice professionals on the fast track to Freedom (5-7 years max), visit www.freedomfounders.com/step-1 to apply for a seat. 4. Want to Work Directly with Me? If you’d like to work directly with me and a small group of my closest investment colleagues, with direct access to the dealmakers and asset classes that I invest in, just send a message to my Executive Assistant (Lindsey@FreedomFounders.com), and put “Fast Access” in the subject line. Or, call (972) 203-6960 Ext 144 and leave a brief voicemail for Lindsey. Let her know you’re interested in the Fast Access program – we’ll set up a time with you to talk, find out about your goals, and see if there is a fit.