BiggerPockets Money Podcast: Do You Need Debt to Reach FIRE? How to Use Leverage to Build Wealth

Release Date: November 12, 2024

In this enlightening episode of the BiggerPockets Money Podcast, hosts Mindy Jensen and Scott Trench delve deep into the intricate relationship between debt and the Financial Independence, Retire Early (FIRE) movement. Joined by seasoned FIRE enthusiasts Amanda Wolf and Kyle Mast, the discussion navigates the nuances of leveraging debt to build wealth while avoiding common financial pitfalls.

1. Understanding Personal Debt Profiles

The episode begins with the hosts and guests sharing their personal experiences with debt, setting the stage for a comprehensive exploration of debt management within the FIRE framework.

• Scott Trench reveals a substantial $1.92 million in outstanding mortgages across multiple rental properties, a $16,000 auto loan, and a minor credit card balance he pays off monthly. He distinguishes between personal and business debt, emphasizing his comfort with leveraging real estate.

  [01:52] Scott Trench: "I have $1.92 million in outstanding mortgages across our rental portfolio."

• Amanda Wolf shares her journey from being debt-ridden to becoming entirely debt-free. Having recently paid off her last car loan, she discusses the emotional toll debt took on her credit score and peace of mind.

  [03:26] Amanda Wolf: "I paid off my final piece of debt, which was my 2014 Ford Escape... my credit score had been an 8.46 and it dropped 80 points when I paid my car off."

• Kyle Mast positions himself between Scott and Amanda, holding millions in mortgage debt similar to Scott but also reflecting on past student loans and vehicle debt. He underscores the importance of maintaining a balance between leveraging and financial security.

• Mindy Jensen discusses her mortgage debt and a line of credit against her stock portfolio used for real estate investments. She highlights her strategic approach to debt, focusing on mortgage-related obligations while avoiding consumer debt.

2. Prioritizing Debt Management vs. Investing

A central theme of the conversation revolves around whether to prioritize paying down debt or to focus on investing to accelerate wealth accumulation.

• Amanda Wolf recounts her initial approach of juggling multiple financial obligations without a clear strategy. She eventually prioritized paying down high-interest debt but later recognized the benefits of investing over eliminating low-interest loans.

  [06:44] Amanda Wolf: "I prioritized paying down my student loans because having all that debt freaked me out... I would probably take back because my student loans were like 3% interest... instead invest the difference."

• Kyle Mast shares his early financial strategies inspired by personal finance literature, emphasizing aggressive debt repayment to reduce monthly obligations and gain financial freedom.

  [11:00] Kyle Mast: "Our priority was to eliminate every monthly payment we had... the faster we could eliminate the largest of monthly payments, the sooner we could take a job where... my wife could make less in a job that she maybe liked more."

• Scott Trench discusses his strategy of leveraging low-interest mortgages as investment tools, contrasting it with higher-interest personal loans. He advocates for using debt as a means to build long-term wealth, provided it's managed prudently.

  [15:33] Scott Trench: "The 30-year fixed-rate mortgage... was an unbelievable window of opportunity. I plan to hold those and never pay them off... it will have a big advantage for the next 20 years."

3. Leveraging Debt to Build Wealth

The guests explore how debt can be a powerful tool for wealth creation when used strategically, particularly through real estate investments.

• Scott Trench emphasizes the benefits of leveraging real estate debt, highlighting how fixed-rate mortgages can serve as a hedge against inflation and contribute to wealth accumulation over time.

  [37:38] Scott Trench: "Real estate was the tool... holding those and never paying them off will be a big advantage for the next 20 years."

• Kyle Mast adds that leveraging debt should be aligned with sound investment principles and sufficient cash flow to cover obligations. He warns against over-leverage and stresses the importance of reserves.

  [41:15] Kyle Mast: "Have the cash flow of the business, that is a good way to hedge your debt and hedge your financial situation in the long run."

4. Risks and Pitfalls of Debt

While debt can be an asset, it also carries significant risks, especially when mismanaged or over-leveraged.

• Mindy Jensen warns against high-leverage strategies common among some real estate investors, such as leveraging 95-97% on properties, which can lead to financial instability and potential loss.

  [50:00] Mindy Jensen: "You've got properties that are leveraged between 95 and 97% and that's kind of a one-way ticket to losing Kyle Mast's game of staying in it."

• Scott Trench highlights the dangers of over-leveraging and mismatching debt instruments with investment goals. He cites examples of catastrophic losses when high levels of debt meet real estate market downturns.

  [45:01] Scott Trench: "If you take out a short-term debt instrument to finance a long-term investment... that thing's going to suck a lot of cash out of your life."

5. Responsible vs. Irresponsible Debt Usage

The conversation differentiates between leveraging debt responsibly to build wealth and falling into irresponsible debt traps that can derail financial goals.

• Amanda Wolf criticizes trends like accruing high-interest credit card debt for non-essential purchases, labeling it irresponsible and stressing the long-term consequences.

  [39:09] Amanda Wolf: "There is a very popular TikTok trend... I'm in my credit card debt era... that's going to haunt you for potentially decades."

• Kyle Mast reinforces the importance of borrowing only for appreciating assets and maintaining adequate reserves to manage unforeseen expenses.

  [44:33] Kyle Mast: "Don't buy things that don't appreciate with debt... have those reserves as your properties increase."

6. Behavioral Finance Perspectives

Understanding one's behavior and emotional responses to debt is crucial in managing it effectively within the FIRE journey.

• Amanda Wolf introduces the concept of balancing mathematical considerations with personal feelings about debt. She emphasizes that emotional comfort with debt varies based on individual experiences and backgrounds.

  [18:42] Amanda Wolf: "There’s the math answer and the feelings answer... how does the debt make you feel?"

• Kyle Mast echoes the sentiment, noting that financial strategies must align with personal behavior and risk tolerance. He advocates for flexibility and adaptability as one's financial situation and life circumstances evolve.

  [20:13] Kyle Mast: "Be willing to learn over time and adjust your thoughts... seasons of life change and you should probably change along with that."

7. Final Advice and Takeaways

As the episode concludes, the hosts and guests offer actionable insights for listeners embarking on or navigating their FIRE journeys.

• Scott Trench advises using debt strategically to purchase appreciating assets, ensuring that investments generate sufficient cash flow to service debt. He also underscores the long-term benefits of minimizing personal debt to streamline the path to financial independence.

  [55:48] Scott Trench: "Use debt only to buy assets that can appreciate over the long run and ideally that cash flow enough to service the debt."

• Kyle Mast encourages listeners not to be overwhelmed by the complexities of debt management. He suggests focusing on fundamental financial habits like saving, building reserves, and reducing taxes, regardless of one's leverage strategy.

  [53:43] Kyle Mast: "Try not to get overwhelmed... you can still accomplish what you're looking to accomplish."

• Amanda Wolf emphasizes the importance of defining personal financial goals and crafting strategies that align with one's vision of the "American Dream," whether that involves aggressive investing, steady saving, or a blend of both.

  [54:37] Amanda Wolf: "Take a step back and figure out what you actually want out of life... what is that American Dream for you?"

8. Notable Quotes

To encapsulate the essence of the discussion, here are some standout quotes from the episode:

• Scott Trench ([01:52]): "I have $1.92 million in outstanding mortgages across our rental portfolio."

• Amanda Wolf ([03:26]): "I paid off my final piece of debt... my credit score had been an 8.46 and it dropped 80 points when I paid my car off."

• Scott Trench ([15:33]): "The 30-year fixed-rate mortgage... was an unbelievable window of opportunity."

• Amanda Wolf ([18:42]): "There’s the math answer and the feelings answer... how does the debt make you feel?"

• Mindy Jensen ([50:00]): "You've got properties that are leveraged between 95 and 97% and that's kind of a one-way ticket to losing Kyle Mast's game of staying in it."

• Amanda Wolf ([39:09]): "There is a very popular TikTok trend... that's going to haunt you for potentially decades."

• Scott Trench ([55:48]): "Use debt only to buy assets that can appreciate over the long run and ideally that cash flow enough to service the debt."

Conclusion

This episode of the BiggerPockets Money Podcast provides a balanced perspective on the role of debt in achieving financial independence. By sharing personal experiences and expert insights, Mindy Jensen, Scott Trench, Amanda Wolf, and Kyle Mast offer listeners a nuanced understanding of leveraging debt responsibly to build wealth while highlighting the importance of aligning financial strategies with personal values and behaviors. Whether you're just beginning your FIRE journey or looking to refine your approach, the discussion serves as a valuable guide to navigating the complexities of debt and investment.