Financial Independence: More Debt for less freedom?

We are at a very interesting time in our financial journey. Under any other circumstance, I’d say we’d climbed to the top of mountain. I’ve achieved the asset position and passive income that I’d set out too get . But we have an accompanying pile of debt to repay. 

 

Debt is a doubled edged sword. It’s great to help build up wealth and accelerate asset accumulation. It’s helped me take advantage of large market downturns, such as what we had in 2009, and quickly build up positions in undervalued companies.

However I’ve also experienced the downsides of debt, specifically margin debt, which greatly reduced my flexibility when asset values were imploding.  Having to rush to cover when things go south is not particularly fun. Experiences during 2009 reinforced in me a desire not to take on much debt.

So here we are in 2014. Things have moved on well since 2009. The markets have been kind in their generosity. We also got lucky with our housing purchases. Both were made at historically low interest rates not seen for 25 years. Our original condo has now become a rental property, for which we’ve sourced a tenant (amazingly all within a couple of days of listing the property).

Passive income wise, I estimate that we are on track to pull in somewhere in the order of $50k next year, depending on how generous companies are with their dividends, and how fortunate we happen to be with our tenant situation. We’ll see how things go.

Yet, in the midst of all this, there’s still some uncertainty at the sudden increase in debt that we’ve taken on to make all that work. The debt is still very manageable in the context of our overall asset position. We are probably running at debt to total assets of around 40%. I suppose it’s just the fact of the quantum of the debt that will take a bit of getting used to.

I’ve found myself occasionally thinking these last few days….did we take on too much…are we swapping out the financial independence dream for a debt nightmare instead? Financial independence to me is all about living a more minimalist lifestyle. You keep your needs and wants to a minimum, consuming only what you need. Did we really need so much house?

But then the reality of our current situation hits me. We’re all running into each other in our current condo. 2 bedrooms amongst 4 folks doesn’t really cut it for us. It’s hard to have people come and stay over, and I expect our families will be spending extended time with us visiting. Having the kids give up their rooms to squeeze in parents/inlaws is just not tenable.

We’re going from something that’s not spacious enough in the long term, to something that has almost too much space! That’s going to take some getting use too. The good news also is I feel that our tax position is far more efficient. We’ve been doing much right from a tax position this year. Maxing out the 401k, tax sheltered FSA’s for childcare expenses, and deductible mortgage interest should help out alot this year.

But more than all of this, I’m most excited about the experiences that we will be able to have in the new place. A backyard for the kids to run around in, meals out on the sun, on the deck and the ability for the kids to exist without constraints and confines of condo living (no banging on doors! no running in halls!). A bit of room for us all of to coexist in.

At the end of the day, I realized that financial independence needs to be achieved based on your own individual aspirations for quality of life. For us and our family, the move from a condo to a house was definitely something that we need to do and have to do. In that context, doing it right, at a time of low interest rates and to the right neighborhood also makes sense.

However, what this does to is fundamentally change the nature of my financial journey. I’m no longer in asset building mode, or passive income building mode. I’ve got to where I wanted to get to. My journey is now a debt repayment journey.

I’ve done a complete 360 in a very short space of time, from having minimal debt to having a debt ratio that’s likely pretty typical for most American families. That’s very humbling, and very exciting at the same time. Because I know once the debt mountain has been cleared, and we do have a definite plan to clear it, we’ll summit our financial independence mountain.

Comments

  1. ILG says:

    Hi Integrator,

    I feel the same way. I recently purchased a house myself and am dreading spending money on stuff to put in it. I am a pretty minimalist person too. In the long run I think it will go well, I bought it in a great area where the market is hot and the local economy is humming along. Eventually I hope to use it as a rental!

    It’s all part of the plan =) and as long as you have one then the additional debt won’t be a big deal. Debt used wisely can increase your returns, plenty of companies do it

    Take care!

    • Integrator says:

      Hi ILG,

      Thanks for stopping by. I’m also fairly confident that things will turn out fine in the long run. Frankly, the purchase of the house enabled us to get a rental stream going. I always find myself thinking, could we have got by with slightly less. It’s the frugal upbringing in me!. I have to say though, it’s a very nice place. We’re looking forward without trying to look back!

  2. Congrats on getting to $50k or at least damn near close to it for 2015. That’s amazing! And ahead of schedule at that! Even though your debt level is higher it’s not like it can be called early if the local housing market goes to crap unlike margin debt with financing stock purchases. Since your original plan was going to take longer than this you can always work a longer if you truly want to retire early and use your income, work or dividend/rental, to pay down the debt to get the overall debt level lower. Our plan as of now is to do something along those lines where we throw as much savings toward investments now and then will focus on at least getting a good chunk of the mortgage paid down. Congrats again!

    • Integrator says:

      Thanks JC!. Admittedly I cheated on this goal, as I was originally aiming for a “debt free” $50k passive income by 2018, but we’ll take it all the same. I’m encouraged by the fact that the house debt is fairly stable debt, and not as volatile as margin debt, and therefore not as callable. Makes a big difference to one’s sanity!

  3. Congrats on the progress and being ahead of schedule, FI. Like JC said, your debt wont be called early, so you can chip away at it. I understand the need for more space for your family to grow into. We are facing a similar dilemma. We’ve been house shopping – and considered buying a condo for a little bit, but decided that somethign like a 2-bed condo wouldnt do as it doesnt give us any room to grow into.

    Best wishes
    R2R

    • Integrator says:

      Hi R2R,

      Yeah, we’ve definitely outgrown the condo….it doesn’t meet our needs anymore.My blood pressure shoots up every time the kids jump up and down and run down the hallways, because we want to be good neighbors. It will be nice to let the kids live a little more, and do all the things that most kids do (ie create havoc!)

  4. Way to go!! I noticed your previous goal was to get to $50K by Jan-2018 so congrats on getting to your goal 3 years early! I suppose $75K is your new goal for Jan-2018 at the rate you are going. Well done!

    Regarding the new home purchase and debt, I feel your pain and understand the mixed feelings you have towards the new debt. Our housing expense is our family’s largest expense but it is what we value most. We’ve considered the possibility of cheaper housing but the benefits simply didn’t outweigh the sacrifice.

    • Integrator says:

      Hi Frugal Family,

      Thanks for stopping by! I’m actually shooting for about $60k by 2018, with no debt outstanding, other than our housing debt. I’m hopeful that we can be completely debt free by 2023, with free passive income in excess of $75k annually by that point !

      I agree with your sentiments towards the house. Certainly one of our biggest expenses, but we want to enjoy life with the family, and the house is probably the thing that you all collectively spend the most time in. I don’t believe that this is a decision that we’ll regret.

  5. Evan says:

    I am sure the increase in living space will come with extra costs as well – The Wife and I moved from a 2 bedroom townhouse to a 4 bedroom house last January and it wasn’t just the debt repayment that has increased it is the covering costs that are also pretty damn annoying (heat, A/C, taxes, etc).

    Notwithstanding, $50K in passive income? That is AMAZING!!!

    • Integrator says:

      Oh yeah, our taxes have increased significantly….and I’ve no doubt our utilities will go up meaningfully as well. I was just watering the back lawn yesterday, and it occured to me that general maintenance around the house is likely to add up over the course of year, something which we didn’t have to worry about with the condo.

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