We think debt is awesome. Debt reduces our risk and increases our return on investment. But even better than those two factors, however, debt allows inflation to make us wealthy while we make no extra effort other than to keep on breathing.
Yes, you can benefit greatly from inflation. Enough to reach financial independence.
Sometimes a clear cut example is better than 10 minutes of frenzied explanation. Let’s look at one. Pretend you just bought six single family homes for a grand total of $1 million dollars. Assuming you can qualify for it, you put 5% down, which leaves your outstanding principle balance at $950,000.
Let’s further pretend that inflation in the first year of your loan was 4%. Yes, that is laughable, we know. The real rate is probably closer to 10% or more but let’s go along with the government’s fantasy for this example.
The only payments you make on your loan for that year are interest, which will likely be covered by income from rents anyway. You paid nothing on the principle balance. At the end of that year your balance is reduced to the equivalent of $912,000 because of inflation and the shrinking value of the dollar.
That’s good stuff. That’s powerful stuff. That’s the kind of thinking you’re not going to hear from your typical Wall Street financial services company. It’s better to borrow money today and pay it back later than to pay it off today.
And this happens every single year you hold that mortgage!
