A few months ago, my wife and I met a financial planner that went over all of our financial things. Our assets, debts, income, spending, taxes, insurance policies, will, and a lot more. His goal was then to go over it all and come up with a few specific recommendations. I expected to be sold on a few different products, probably around life and disability insurance. It did happen to some extent but one of his main suggestions was something that I did not expect.
-borrowing to buy solid investments
Why? Basically, because we are young, have decent level of assets, no debt except for our mortgage. Add to that the fact that we are capable and willing to take on more risk, do understand the benefits and possible downsides of making such a move, etc. Basically, any money that we can save is currently going into our tax-free retirement accounts but once that’s done, there are 2 main choices:
-increase the speed at which we pay our mortgage
-save money in non-taxable accounts
Since we are paying very little interest on our mortgage, the thinking is fairly simple. Over long periods of time, the odds are that we can generate more money through our assets than whatever we’d be saving if we were paying our mortgage. It’s fairly straightforward and I certainly know that in theory this is something that makes a lot of sense.
Why Didn’t I Think About This Myself?
You’d think that with all of my financial education, my CFA title and everything else, I could have gotten to this conclusion myself. I guess this is proof that it’s always useful to see someone who is more “impartial”. I’m still not a huge fan of leverage but I do think that to some extent, it makes a lot of sense to increase my leverage.
The tax perspective also makes this more attractive because any money that I end up paying in interests in borrowing to fund investments is tax deductible.
How Much Debt To Take On?
I’m seriously considering adding some debt, but how much? I’ll probably use a ratio of debt to assets.
For example, if I currently own $500K in assets and $200K in debts and am willing to have a 50% ratio, I’d be able to borrow $100K to invest in the markets (or other passive income generating methods). Why? Because I would then have $600K in assets and $300K in debts (300/600 = 50%).
Have You Considered Doing This?
If you are paying 3% on a mortgage and need to generate less than 2% (because of taxes impacts) to breakeven, do you think it’s a no-brainer to keep some level of debts?