Friday, February 17, 2012

Wealth Allocation

As kind of a follow up to the "If I had $1,000,000..." post, I should say that personal security and investment are two different sides of wealth.

Having debt is a risk to security but a benefit to investment. If I am buying a house I will be living in, it is best to have it paid off because it is not generating income, so interest on debt is a net loss. If I am buying properties to rent out...with the caveat that I wouldn't buy them if the expected return was less than the interest on the debt, then I would be better served to have debt, because I could purchase more, and have more resulting income.

The leverage provided by going into debt to make a large purchase/investment is a huge advantage. But that does not really apply to purchases of items for personal use...even items that may appreciate in value (like houses and art). Mostly this is because working investments (like rental properties or starting small business) have better returns and can offset the debt service costs (interest). If they didn't, well, they wouldn't be good investments.

1 comment:

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