Wednesday, June 8, 2011


          It has been said the three most important inventions were the lever, the wheel and fire.  In personal finance, use of the lever provides significant advantage.

          In personal finance, the lever is called leverage and refers to borrowing money to achieve financial advantage.  In physics, the lever uses a pivot point to gain mechanical advantage by magnifying the force available.  In personal finance, the force you are working with is the asset that you are leveraging.  The pivot point is the amount you borrow.  In order for leverage to work to your advantage, you have to be able to afford the cost of leverage.  You have to be able to afford what you borrow.

          Young people who have saved some money and want to buy a house or a business or a rental property or even equities can use a combination of saved money and borrowed money to buy more of an asset than they cannot currently afford to buy for cash.  Some people make enough money when they are young to pay cash for everything.  Good for them, but few of us could pay cash for everything until later in life.

          As you age, you want to pay off all the leverage you have.  For ordinary investors, paying off your home is one of the best actions you can take.  I have seen this rule applied repeatedly in my career.  I know people who have made a lot of money during their working careers and they still have mortgages.  Those with mortgages after retirement always seem to be complaining about money.

          In retirement, you reduce the amount of income you need to enjoy a very nice life when you own your principal residence free and clear. 

          I have written about my sever rules for successful personal finance and paying off your debt, especially your principal residence, is one of the most important for retirees and pre retirees.

Very Truly Yours,
Enhanced by Zemanta

No comments: