Over-Leveraged? How to Know! | Financial Advice | Dr. David Phelps

– Here from Freedom Founders. I got a great question as a followup to my recent blog on using leverage in life. Leveraging financially
other people’s money, levering other people’s
time, talent, and resources. As I said on that blog, leverage is the only way
to true growth in life. Someone came back and asked
a really good question. They said, well, David,
financial leverage, that could be dangerous, can’t it? When does someone know if
they’re over-leveraged or not? Great, great question. So we’re talking about just
financial leverage right now. Yes, absolutely. Leverage financially
using debt as a mechanism to acquire either education
for self-improvement, to acquire the opportunity to
open a business, a practice, the debt that one uses to
acquire other capital assets such as real estate investment, yes, absolutely, it can cut both ways. And so, we have to look at, well, what kind of leverage are we using? In other words, what kind of financing? The type of financing is one of the keys. Short-term financing,
variable-rate financing, financing that has a call provision that the bank can call the loan like or with a line of credit whenever they want to, that’s really dangerous financing and should only be used
for very unique situations where the borrower has
the ability to pay that money off quickly and relatively easily. Now, using longer-term
financing with fixed interest rates over as
long a term of amortization as possible when you’re
investing in yourself, your business, your
practice, or real estate, that’s good debt because you’re optimizing an opportunity to grow. Those aspects are growth. Consumption financing, no. I’m not talking about that at all. Consumer life, no. I’m Dave Ramsey-esque about that, but the only thing I like
people to leverage into would be a modest house, home,
with a fixed-rate mortgage. Beyond that, no, you
should be paying cash. I’m talking about investment, investment. So how do you know when
you’re over-leveraged? There’s a difference between
investing and speculation, and that’s where people get confused. Investing’s where, in my opinion, again, if you’re investing in yourself, investing in the right education. There’s a lot of kids
today that are getting degrees and graduate degrees in things that are not gonna give them a good return because there’s not a need or the skill set or knowledge they’re acquiring doesn’t pay very well in the marketplace. See, the marketplace dictates everything. I don’t care how smart you are, I don’t care what your IQ is, I don’t care how hard
you’re willing to work, if you don’t have a skill set that the marketplace is willing to pay for, I’m sorry, that’s up to you. So just deciding what
kind of education you’re pumping down into your system is a big, big part of whether I’d say, you know, undertake the debt leverage or not. There’s a big question
today whether or not professional schools like dental schools with students coming out
with 250 to 400 to $500,000 of debt over eight years
of college is worth it. That starts to get a little bit iffy. Now, can it still be done? Yes, it can be done, but not with the ease it was 20 to 30 years ago
when the debt coming out of those schools was much, much less. What’s the bottom line here? Let’s look at investing in real estate. That’s one where people will
get caught up many times, and again, same thing, the type of financing
one uses is critical. Don’t use lines of credit, don’t use short-term
borrowing with variable rates or call provisions – to
invest long-term, okay? If you’re gonna invest
long-term into a capital asset, business or real estate, you need to have a long-term term, fixed-rate
mortgages that don’t vary, and the amortization is
over many, many years because it protects your cash flow. See, cash flow is everything. When you are leveraging you want to have a investment in something
that is currently producing cash flow and
has a highly reasonable expectation to continue
to produce that cash flow. Like single family houses
in good economic areas, no matter what kind of volatility we have in the rest of the marketplace, those houses are always in demand, and you can always rent them. I’ve been through four downturns with my real estate over the years, and I never had my houses go vacant. There’s always people that want to live in a good house
and will pay you rent. You can get into more
volatile types of real estate, more commercial, that has
a higher risk profile. I would avoid that unless
you really know that area, and most of the people
I’m talking to don’t. You need to stay with stuff that’s simple, safer, gets you stable
returns when you’re investing. So those are some of the keys. In Freedom Founders we go into a lot more depth into these areas. We build up the financial
acumen of our members so they really have the
ability to understand where they’re putting their money, where it’s safe, where there’s high risk, they can make those
decisions based on their risk profile and what their goals are. If you don’t have those constructs, then you need to get them. You can get them in many places. If you’re someone who’s thinking about being a part of Freedom Founders, put an application in sometime and we’d be glad to talk to you. Otherwise, you know, get
your education, read books, become invested in other
people that have already gone down the road that
you want to go down. That’s one of the keys
to everything in life. But just don’t sit on
the sidelines and gamble. It’s too big a gamble on your future. That’s my tip for today. Thanks for asking the question. Yes, you can become over-leveraged, but it’s because you’re
speculating rather than investing. See you next time.

1 thought on “Over-Leveraged? How to Know! | Financial Advice | Dr. David Phelps

  • What else would you like to know about investing in a future video? Here is a great key freedom strategies playlist I made for you! https://www.youtube.com/watch?v=td3mAYLaE0s&list=PL6UzhmjhYcomKRn4mjDa6EtwvTrnrAIqN

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