Worthless at last! Worthless at last! Thank God Almighty, worthless at last!
Bells are ringing! I am finally worthless!
With my paycheck today my net worth has finally passed the literal and psychological $0 barrier. My financial leverage given a net worth of $1 is about 45,000-to-1. Let this be a lesson to everybody: massively over-leveraged financial positions can only end positively. Look at Long-Term Capital Management, MF Global, Bear Stearns and AIG: their executives still managed to escape with millions of dollars! (/sarcasm)
What now?
In all seriousness, my next financial move is to buy a house, even before I pay down my student loan debt. Yeah, that’s right. I am buying a house while I am still worthless. I have many reasons for this decision including, but not limited to: tax considerations, high rent-to-purchase ratio, a hedge against inflation, to further leverage myself (recent college graduate) and many others. I have heard arguments for and against this decision and have weighed it carefully so let this be caution to those who will comment about how much risk I am assuming. As an asset/net worth poor individual with too much cash flow, the need to leverage myself into higher net worth is one of my most pressing personal finance goals.
Why am I buying a house while I still have debt?
The bigger reason I am writing this article is (as I am certain our friends at 6400 Finance, Control Your Cash and Iam1%will agree) to claim a strong distinction between personal finance bloggers and debt bloggers. There is a dangerous undercurrent in much of debt blogging and personal finance blogging recently that involves a knee-jerk reaction to any suggestion or embracing of debt. Whether this starts with Dave Ramsey’s assault on any type of debt no matter what or improper usage by a few companies and individuals I am not certain. I do know, however, that many self-proclaimed "personal finance" bloggers revolve 99% of their writing around their budget and debt countdown. While I do agree this is an important aspect of a holistic personal financial tapestry, it does not weave together many of the intricate strategies for wealth management. To this not-so-humble writer, personal finance entails economics, politics, taxes, estate planning, real estate strategies, career advice, educational opinions, investing, retirement AND debt advice. A personal finance “blog” that does not deal with any of the other aspects of personal finance is false advertising.
Leverage helps grow net worth faster but at higher risk
So, allow me two claims:
- Personal finance blogs unite and draw a distinction between, on one hand, an engrossing holistic study of personal finance and, on the other, simple debt blogging about how much you can’t wait until you save enough money to buy a car
- Net Worth = Assets – Liabilities
The only reason I point out number 2 is to show how net worth does not only exist when liabilities equal zero. Of similar note is that CASH FLOW IS NOT ASSETS, there is a difference between stocks and flows, and leverage/debt is frequently used by individuals and companies responsibly and to great cause. Especially in an infancy or growth stage. Can you imagine where McDonalds or WalMart would be today if they had not financed a significant portion of their expansion through liabilities and leverage, even in such a low-margin industry! Where would they be if they had to wait to build up retained earnings to even construct ONE more store?
Long story short: cash-flow rich with liabilities does not necessarily dictate a need to pay down liabilities.
Cheers,
Cameron Daniels
