A couple of weeks ago we discussed investing in debt both in personal debts (auto loans, credit cards) and in investment debt (mortgage for a house).
The alternative to this is investing in assets. This is typically done by selecting a specific investment product, such as a money market at your local bank, stocks or bonds, or real estate. When you buy an investment product you are essentially loaning the use of money you do not need today to someone else, providing them the use and control of that money in exchange for interest they pay YOU. This interest can be in the form of direct interest, dividends, or appreciation.
The key difference between investing in assets versus debt
When you invest in debt, as discussed before, you are repaying money that you have borrowed from others.
When you invest in assets, you are allowing others to borrow from you, with certain expectations that the money will be there in the future (Safety), readily available when you want it or need it (Liquidity), and with increased buying power (Rate of Return).
- The tricky thing about real estate: The down payment you make on your house is considered investing in an asset. You’ve given that money to a bank that they now have use and control of. In return, you now have an asset called “home equity” or house wealth with the expectation that you earn all future interest gains on that house (appreciation). The mortgage you borrow to finance the difference between the sales price and your down payment is considered investment debt.
Understanding this basic concept that everywhere you choose to locate your money must be viewed as an investment, can have a lifelong impact on your ability to create financial safety and wealth for you and your family.
Choosing whether to pay off investment debt or increase investment assets can be a difficult choice. Next week we will discuss the three filters for making these critical decisions with your money.