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ADPI_036: Paying Off Debt V Investing For Future

Oct 23, 2018


Episode Transcription:

Should I pay down my debt or should I invest? Hey what's going on guys welcome to the active duty passive incoe podcast. It is going to be a great episode on a decision that really challenges everyone at some point right. Whether you should pay down your debt or should you invest. It’s going to be great tune in. but first I need you to text house hacking to 345345 really quick okay. Take out your phone and text house hacking Hotel Oscar uniform Sierra echo hotel alpha Charlie kilo India November golf. to 345345 to make sure that you are staying up to date with our book release and any other awesome things going on all right let's kick it.

Hey freedom fighters welcome to the active duty passive income podcast. The only place where military members, veterans and their families learn how to build wealth through real estate investing. I'm your host Mike Foster and I'm here to show you how to stop wasting your benefits. Now get off your ass, step up to the firing line and make ready for today's lesson. Shooter stand by.

All right all right what's going on guys? Hey check it out so we are going to be talking about paying down your debt versus paying off interest okay. This is a very very interesting dilemma okay. It’s a good dilemma to have and it can be a very bad dilemma to have. Honestly I think depending on what side of the spectrum you are how old you are how much your risk tolerance is right, all these factors depend on what you'll ultimately decide to do. I mean let's talk about the pros and the cons for each single one and then let you decide you know I mean if you are listening to this and you are at a particular position in your life where you're going through a major transition.

Whether it's getting married, whether it's you know getting into a relationship in general right. whether it's having a child, whether it's you know transitioning out of the military you know whatever your transition point is; this is something that's probably going to be at the forefront of your mind. Because you're trying to figure out you know do I take the risk and build long term or do I mitigate my risk and cover my ass short term right. So really it this is all going to depend on you your financial position and you know exactly what you're looking to do what your goals are. 

Okay now again it's important to understand I am NOT a financial adviser. All right I am just a single person that well I'm a single, but I have a person that is interested in your financial future. So I'm going to give you advice based off of my education. Does that make sense? All right cool so let's go ahead and do it. If you're going to talk about paying down debt okay, it's important for you to understand these pros and these cons and the pros so you're going to gain more cash flow from your hard-earned money.

What do I mean by that? well so you have a job right whatever your job is in the military or outside the military you know wherever you are at in your life you have an earned income from your nine-to-five or your 6:00 to 6:00 or whatever your work cycle is right. If you pay down your debt whether it's a credit card, whether it's a car, house whatever right; then yeah you're going to earn more cash flow from your income that you receive from your job okay. That makes sense right. Because the less debt you have the more cash you'll end up you know being able to use at the end of the month towards something else got it. You’ll also be able to decrease your liabilities. Now again if this is something like a car or student loan or you know personal loan whatever right, whatever your debt may be you are decreasing that debt.

Your liability is something that is taking money from you and not giving you back does that make sense? So yes so you go by you taking your money and paying down your debt, you're decreasing your liabilities. Which is good okay. You decrease the amount of interest that you pay overtime as well.

Okay now let's think about this if you have a credit card where you're paying over 10 percent interest. Let’s say it's like 14 or 15 that seems to be pretty typical. Then yeah you are going to pay down less interest over time if you put more money towards that card every single month, it will decrease the amount of time it takes you to pay that debt in the long run. The same thing with a mortgage. If you pay extra to the principal every single month or every single year, then you are cutting down that amount of time as you are expected to pay for that loan, does that make sense?

Same thing with personal loan, same thing with your car note really with any loan right. It doesn't matter what interest you're paying. If you are putting extra towards that principle and you are cutting down the time that you're taking to pay. Which is great okay. You also build immediate security. now what do I mean by immediate security is that your primary concern right, when you're paying down debt is what happens if right the ambiguous what happens if blah blah blah all right or fill in the blank with your scenario.

Now if you are paying down your debt you increase your immediate security. Because if something happens and say you need to take out another loan to cover it or you need to just focus putting money towards that issue, then you paying down your debt will help you out should that issue arise. But the reason why I say its immediate security and not long-term security is because really you're fulfilling that need. Now right in the long term let's say 10, 20 years from now who knows what's going to happen. You may have to take out a significant amount of money to cover a serious issue right.

You paying down your debt now depending on how much you're paying, doesn't really do anything to help you out. It just kind of fulfills that that need for immediate security in case something happens a lot closer to now while you are expecting something to happen or while you're you know hoping to build your security. Because again in the long term right 10 years 20 years, if something happens then you don't even know if you're still going to have your job okay. I mean let's be honest we can think that paying down a person alone right now or paying down a car note right now versus investing is going to help us out in the long term. It only does if you don't take on any more debt, does that make sense? I want you to let that sink in right.

You paying off your debt right now right only helps you long term if you don't take on any more debt to replace it. All right that's a huge huge thing to understand and I don't think a lot of people do. They think that you're paying down your debt is going to help you in the long term. But it doesn't if you take down another debt to replace it. Also if you take on another debt that has a higher interest rate yeah.

Okay so keep that in mind when you're choosing to pay off your debt all right. It’s not necessarily long-term security you're building. You’re trying to trick in your mind thinking that. But really it's more immediate security. So all right that's important to understand. All right you also gain more equity in an asset or in a property right. If you're paying off your debt. Now if you own debt in a particular asset that's bringing you money and that's really good, you're paying that off that's fine.

Right you're building more equity right or more ownership in that investment, in whatever it is that you have. Whether it's a house or I mean your car is not really an investment, so that's a bad example. But you build more equity in your car when you pay down your debt on your car note right. Now of course we all know that your car loses about 30 percent of its value when you drive it off the lot. So that kind of sucks. But you know to me an if you have the ability to pay your car cash then hey you own 100 percent of your car right. So however much it's worth you own a hundred percent of it, so that's kind of good.

But at the same token understand now going into the cons right if you are putting your money, right your hard-earned money into that thing whatever it is right you're putting more of your money at risk. Understand that. For the incense right you pay your car cash that's a lot you drive it off. Now you just lost 30 percent. Well guess what you just lost 30 percent of the money that you just spent on that car, I hope that makes sense right.

You’re putting your money at risk to the market right because it's only, because the market right just dictates everyone else, I'm sorry everyone else dictates the market excuse me. Everyone else dictates the market because your asset or your thing whatever it is it's only worth as much as someone's willing to pay for it right. So if you buy a house in cash and hey guess what your house is worth what someone else is willing to pay for it? So if the market tanks your money is in that asset and you just lost it. Makes sense?

Now if you're trying to pay back the bank and you still have a mortgage on your house, then yeah that's great if the market drops I mean as long as you're getting enough money in rental income to cover your expense; you're good. Ride it out you know what I mean. But if you are not right and you are barely making enough to keep up with the mortgage then you know that's a risk okay. So paying down debt to cover that expense to allow yourself to refinance because you have more equity in that property, that can definitely help right. That could be an example of something long-term that is helping you out in that instance right. If we're going back to what I said about building immediate security, you can build long-term security if you're planting that money or that seed correctly paying off that debt. 

So in the example of a rental property maybe that you own where you're not necessarily earning a lot in rental income, but you have a lot of equity ownership in that property. So should the market fall you can refinance and then you can take out a lower you know mortgage because you own more of that property, does that makes sense? Again assuming that market doesn't fall lower than what you've already paid on that property. Again okay so there's a bunch of risk that you have to take into the account there. Okay but hey you also miss opportunities to invest.

I mean let's just go ahead and face it right if you're focused on your debt right in your short term dilemma, you may miss a great opportunity to invest if you're educated enough to make that investment and you're trying to decide which one's better. I mean it's something to factor in. but you also you miss opportunities to deduct taxes okay. Now this one's kind of twofold. Because you're paying down debt yes. Right so you are putting more security, right immediate security in your life.

However if you are borrowing debt right you're able to deduct the interest off certain you know things that you borrow for right like your home. You may be able, well you are able to deduct the interest that you're paying off your home. You know within limits but you know there are tax benefits that come with that at the end of each year. so if you're paying more of your debt then you really you're decreasing the amount of interest that you'll be able to deduct over the amount of time that you're you know you have that thing or that house all right. Let’s just say for that example.

Okay so those are the pros and cons of paying off your debt. Oh I'm sorry I'd be remiss in saying men not mentioning your credit score. Okay let's just talk about credit for a second. If you're paying off your debt let's say your credit card debt, you can boost your score. Your credit score, if you are say ping off your balances that they're under 30 percent; okay that's important. You don't want to hold any more than 30 percent of credit card debt.

Because then you will start to you know deduct from your score. So that can definitely help you out. Okay that's a good Pro and then yeah right so and then under also understand too that if you never take any you know credit; then you're also hurting yourself okay. So if you choose to pay down your debts and not take on and the other type of credit; that could hurt you. Because that reduces your credibility so to speak within the banking systems okay. So keep that in mind too. All right so paying down debt you already spoke a little bit about that. Now I want to go over investing.

Because this one's huge and I think you're going to find that there are way more benefits to investing than there are to paying down debt. But again okay don't let this influence your decision if you are in a position where you need to pay down debt because you're too high of a risk right. You’re kind of tipping the scale. The thing is you want to make sure that you maintain balance and I want to say that now before I go into investing. Because it's going to sound really awesome on the investment side.

Because there are way more pros than there are cons and the pros far outweigh the pros on paying down debt. But understand that sometimes paying down debt is a necessity and you have to be able to discern between the two okay. All right so here we go. If you are building a long-term asset investing is great right. Because you're able to you know help yourself in the future right. You’re helping future you out or future you know your family out right. I mean insert whatever. But you investing in at home investing in a life insurance investing in or whatever right, that is something that's going to help you out in the future. Because you're hoping that it will build and not necessarily hoping right you're planning for it to build.

I don't really want to say hope when it comes to investing. You should never invest on a hope alright. You should invest through educated action because you did the research right and you calculated your risk and you went into that investment knowing what the outcome is going to be. Not necessarily hoping that you end up rich in the future. Because that's never a good investment okay. So let me prep this by saying that. Also you're adding passive cash flow into your life. Now you can invest in active things.

But to be honest with you and this is more my personal opinion. I don't think investing is an active decision. I really do think it's passive. I think that if you are active in your investing, you're pretty much creating another job for yourself. Does that make sense? I mean let's just be honest here if you are a flipper right. Flipping is a lot different from buying and holding. But you're talking to contractors, you're organizing everything making it happen and then you are going out and then now having to sell your home.

I mean if you may have a realtor on your team that's great. But you still have to go out there and make some of these decisions. Now I get it, same thing or similar thing if you are a buy and hold investor where you have to go out research your market, you have to talk to some folks. That are on your team before you purchase your property, you have to negotiate the price points all that stuff. Yeah that's great you kind of are semi-active in that too. But at some point you get to the point where your investment now becomes passive and once you find your renter, you're on cruise control and then at that point if you have an issue that comes up and your property manager tells you hey this is the issue; it's like a push button and you say okay fix that issue done.

Okay we'll handle that issue done right. So it becomes semi-active but it's more passive because the more months that you don't have issues but you have rent coming in you're making money and that's great. For flipping you sell your property and now you've got a bunch of cash that you need to figure out what to do it. But you still have to do all that work to make sure that you find the property and then you do the exact same thing over and over again right or you just sit on your cash and then you wait for you know yourself to either put it into something else or I don't know you know whatever. But it's not making you any more money unless you roll it into a passive investment that will make you more money make sense?

Okay I think I went too far on that. But anyway you know just so you understand that. okay you earn more interest on your, this is another Pro right you earn more interest on your money and you otherwise would if you leave it in a bank okay very very important guys if you are putting your money inside the bank you're only getting back maybe 80% percent if you're having savings and that's if you're lucky.

Most savings accounts I've seen is like 0.03 percent or something like that I don't know if it is ridiculous okay, so you don't want to just leave your money sitting in a bank if you've got a bunch of money just kind of sitting there. You’re going to lose money over time through inflation which is like 2% each year on average right, 2 or 3%. So keep that in mind. If you were investing it in something let's say you know life insurance, let's say or investment grade life insurance, let me preface that okay. There are types of life insurance that are that are not investment worthy and I'm going to go over this more. But there's something called investment grade life insurance that will give you a higher percentage on your return each year. Because they pay dividends okay keep that in mind.

Anyway but you know real estate right, we'll talk about real estate. You’ll earn more an interest if you make an educated decision on what you're going to invest your money in okay and you also earn through appreciation, it's great and while we're talking about appreciation let's talk about depreciation and talk about our next pro, tax advantages okay. So with a real estate, if you're investing in real estate there are amazing tax advantages that you have from investing. You can get depreciation right where your property is quote-unquote depreciating over time.

So the IRS gives you the money that you use to invest back over twenty seven and a half years, that's amazing. But your property is also appreciating at the same time so you're gaining a lot of money. But hey guess what you're also able to deduct any expense that you have whether its property management, insurance you know you name it right. Tax, all that stuff, travel back and forth to whatever area. If you have your property in an LLC okay you have to have it in an entity not just no LLC. But in some kind of entity okay. You can get so many tax advantages and so much money back at the end of the year, you just end up saving a lot okay.

Now let's talk about saving for future liabilities. We covered this in the last one where you're paying down debt was building your immediate security, investing is building your long-term security okay. Now if you are only holding your investments for a short period of time, then no it's not going to help you out. But if you are holding your investments for life or you're holding your investments for like ten twenty years that is building you long term security okay. Let’s talk about it real quick example. What happens if you're 25 right now and you are trying to invest your money just in I don't know in real estate, we're going to talk about real estate. Because we're a real estate investing podcast.

But let's say you want to buy like 10 or 20 different properties and you hold them for the rest of your life. okay and now when you're 60 you have to I don't know yet pay some crazy medical expenses you didn't see coming okay and maybe you didn't retire from the military, so you can get the whole TRICARE for life thing right. okay now you have a bunch of investments that you can sell that have appreciated over 40 years right and also you know you've gotten so much cash flow over those 40 years too and they're paid off and the properties are paid off if you didn't borrow from those from loans that's great right. So I mean now you have so much more money that you can use to cover that medical expense.

Because you plan for future you. You were going to need money later on down the road and now you have access to it. It’s great all right. Can’t do that when you're just paying down your debt and I mean it's not really helping me out if you acquired more debt down the road, because you experienced another you know life-changing transition okay.

Alright so let's also talk about now some pros that investing has for other people. So if you're buying rental real estate you're providing jobs for other people right. I mean you need your team right, your contractor you need your property manager right, you need your realtor all these folks you're providing income for because you chose to invest in you know rental real estate or whatever kind of real estate. But you know yet that's great you also you provide housing for other people.

Whether you're looking to sell the home or whether you're looking to rent the home, now someone has the ability to find the thing that you have put your money into and it'll provide them protection you know what I mean? that's great so you're providing other people the same benefits that you're kind of getting in the long term which is you know more cash flow or a safer future okay. Now you're also you have the chance to boost your credit score too when you invest all right in real estate in particular. Why? Because you're holding an asset and when the banks look at your credit all right, they want to see how much debt you have.

But they also want to see what assets you have. Right so if you're trying to borrow from the bank for a mortgage; the first in your and ask you is this your first one? All right do you have any other properties and that's great if you do. Because they understand that hey you are building assets and you're likely going to borrow this money to build another asset. Which will give you money but I'll also give them more money and they see that your payments have been on time, have been great. You know so you're a better credit risk. Does that make sense?

They know that you're borrowing money and you're paying it back on time. you are a better credit risk than someone who you know doesn't really have any debt and decides not to get into any debt and that's you know that's  their prerogative, I'm going to get it. But you know you're not really helping yourself out if at some point later on down the road you decide to borrow a lot of money. I promise you the bank is going to give $100,000 easier to the person that has 10 or 20 different properties and are building assets to the person that has no assets and no liabilities and now is just looking for money.

Alright they don't have anything to base their credibility on, does that make sense? So investing can definitely help boost your credit and boost your reliability okay. Now also you reduce your risk. Okay now I want you to understand here, this is a is a convoluted thing right. Because yes you increase your risks when you invest. Because you're putting your money into something. But you can also reduce your risk by investing too depending on what it is you're investing in okay.

Now we are talking real estate. Let’s go ahead and let's talk life insurance real quick and understand that as you are investing in investment-grade life insurance okay, there's a difference between this and other insurance policies out there. investment-grade life insurance you can use to put your money in right and have it build over time should the market fall for any reason right your money is covered and your floor is zero okay.

Now I know that may be hard to understand. But imagine your little graph going up as the market goes up and when the market falls you just flat line wherever you're at, you flat line at zero and then when the market goes back up you start picking up again. That is how investment-grade life insurance works. It’s crazy I know it sounds hard to believe. But guess what guys this is how the wealthy 1% have been sheltering their money over time.

Because it's legal okay in accordance with the Internal Revenue Code 7702 you can put your money into investment-grade life insurance. I think you're allowed somewhere of about like three times your net worth something crazy like that right. But you can put your money into investment-grade life insurance and yes right depending on what kind of policy you have, it can be a great investment. Why? Because you can use this insurance account to create your own Bank. Think about that for a second right. if you were to borrow from your policy and you get a good investment grade life insurance that doesn't take away from the amount of cash value that you're building, you can take that money, you can use that to invest in say a buying a rental property and then you can pay back the money that you used to invest over time at a higher interest rate and you can build your insurance account up even more. Now you take away the bank right where the bank charges you like four to ungodly amounts of percent of interest right.

But they also don't give you any interest when you hold your money in the bank. So you create your own banking system, it's crazy. Guys I don't want to get too much into the weeds on that. But understand that if we that down the road there is going to be a podcast, it's going to be a lesson about this built in our module. It’s insane and we want to make sure that you guys understand it. Because the benefits of it are amazing. But a lot of people just don't understand it. So they get skeptical and then they kind of turn themselves off. But by turning themselves off they miss out on some of the best tax advantage, you know tax sheltered you know investments out there its insane okay.

Anyway okay so you can do that and again all this is to help your long term okay. Whatever happens to you 30 40 50 years down the road right you are helping yourself out by investing your money and keeping it long-term okay? Now let's talk about some cons. okay so we were talking about reducing your risk with certain things, you also increase your risk. Right if you are putting your own money into an investment.

Now again if you're putting your own money into an investment, okay you can also invest by putting other people's money into an investment and if you don't know what I'm talking about, make sure you read Rich Dad Poor Dad okay. It’s in the show notes. You definitely want to check that book out if you don't know what the term OPM or other people's money means okay. Because you don't have to invest with your own money and if you don't invest with your own money, you can reduce your risk significantly all right; that's great.

But you also increase your debt okay. If you do it that way you can also increase your debt. So that may be another con. If you are someone that is completely averse to debt, maybe you're a part of the Dave Ramsey crowd which is like no debt ever blah blah blah blah blah well that's cool right. But you know they understand that if you are not afraid of debt right because you're making calculated educated decisions and maybe you're using other people's money right to build your investments over time, you could be very very successful.

All right and it's been proven over time so many times after again. Okay anyway that's all I've got. So hopefully that you are in this position right now where you are you know on the verge of making an educated investment or if you're going to pay down debt right. Hopefully this sheds some light to you in your situation, that's kind of what I'm hoping for and I honestly do wish you guys best of luck. I know that this can war people souls a lot, it has with mine multiple different occasions.

But you know what really again like I said in the beginning it depends on your situation and it depends on how much risk you're willing to take okay. Now understand that regardless of what investment you make there's always a risk okay, there's always a risk. There’s no risk-free investment out there I don't care what it is honestly and if anyone told you that there wasn't, they'd be lying to you okay. But there are a lot less risky investments out there now and that of course comes down to your education.

How much are you educated on a particular investment before you make it? but even more so how much are you willing to educate yourself to secure your financial freedom let me ask you that question and if no one's ever asked you that question before, then you need to ask yourself how much are you willing to learn to secure your financial future. I mean everyone can sit you know on their bed or lay on their bed and stare up at their ceiling and wonder what their life would be like if they had all the money in the world or if they you know had the XYZ.

But if you don't ever go out and make you know steps and get educated and take educated action to do it right; then you'll be dreaming forever all right. There are dreamers and they're doers out in this world guys; which one are you? Alright which one are you anyway thanks for tuning in guys, you guys are awesome. Really appreciate your time and man go out there and take some action guys all right. Hope this helped you out. Hey make sure that you're checking out our book ok. If you listen before texts house hacking to 345345 to make sure that you're up to date on our book launch November 1st, November 2nd.

It’s going to be coming out for $0.99 ok for those two days you don't want to miss it. Also if you're in the Hampton Roads area, make sure that you're out at town center tonight at 7:30 at Keegan's Irish pub. We’ve got a meet-up going on, it's going to be awesome. I can't wait for that. Last but not least I want to shout out Jimmy Madigan on our start the spark program, he's got exciting news to share. He just got an offer accepted for a house that he's purchasing in Milton Florida. Hey congratulations man way to take action, that's what I'm talking about. Alright guys I'm out of here. 

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