Financial Coaching Blog

You Cannot Build Wealth by Leveraging More Debt

In other words, don’t take a loan or borrow from elsewhere to pay off a different loan. There are some advisors that will advocate to leverage your debt to build wealth or even use one debt to pay off other debt. Simply put, it isn’t in your best interest…literally, figuratively, & financially.

Here’s some examples:

~ Avoid borrowing from your retirement to pay off debt. Some allow you to withdraw a “hardship loan” but this is basically a ‘loan from your future self’. And let me tell you, your future self WILL BE highly upset with you!
~ Avoid buying real estate (which is basically the down payments) with your retirement savings. Typically you can borrow up to $50k from retirement towards a primary residence purchase without penalty. Again, these are loans from your future self. Your future self is counting on you to make good decisions. Admittedly, this is one of our HARD lessons learned! We are working to fix this mistake at this very moment.
~ Avoid taking out a personal loan to pay off a credit card. I’ve read SO MANY folks online that consider this. I mean, I can see the temptation because usually your can get a personal loan with a MUCH lower interest rate than that of your standard credit card. (20% or more).
~ Avoid HELOCS. Ok admittedly we looked into this to take a Home Equity Line of Credit against our vacation cabin for a down payment on another investment property. 1st of all, there’s only a small few lenders that will do this on a 2nd home, but this could lead you down a path of being “overleveraged” in real estate. (Check out a previous post about being overleveraged).

Building wealth takes time.

Going into more debt to settle other debt is really just ‘breaking even’. Set a budget, list out all of your debts from smallest to largest, and pay them off one at a time.

Money doesn’t have to be about math, start small and build momentum.

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