Avoid bad debt. Seek good debt.
It’s a pretty sure bet that King Solomon would not have been in favor of running up your credit card balance to the upper limit so you can own the latest high-definition big screen television or a sporty new car. This is categorized as icky debt. It will destroy your personal finances and sometimes you along with it. If you can’t pay for the thing with cash, maybe you don’t really need it.
But we also think the good king would agree that all debt is not bad. Some debt preserves the value of your money, increases your wealth, and actually functions as a protective shield against the ravaging effects of inflation. Seriously, these days inflation will kill your portfolio unless you take advantage of the one investment asset that actually turns the weakening dollar to your advantage.
We’ll hit the highlights for now and come back to the topic in future entries. It’s that important. For now, the concept to begin pondering is how to preserve the value of your money in the face of always worsening inflation? Any ideas? No? Here’s the answer. Invest in single-family residential housing purchased through a fixed-rate, long-term mortgage. Due to inflation, you know the value of your future dollar will always be less than the dollar in your wallet today.
Structuring a mortgage like we suggested allows you to put a minimum amount of your own money into the deal, yet become the owner of a hard asset that will have doubled several times at the conclusion of the loan term. Meanwhile, the intrinsic value of the money you have borrowed is diminishing because of inflation. A million dollar loan, in real terms of what it will buy, decreases at the annual rate of inflation, by the time it is paid off. This has the effect of actually reducing the bank’s profit and increasing your own.
If you’re new to this way of thinking, that’s probably enough information for now. Don’t worry. We’ll revisit the topic soon.
The Solomon Success Team
Flickr / alancleaver 2000