Living frugal has just been a natural way of life for me. I’ve minimized my housing expenses, buy cars with cash and only carry liability coverage, maximize my 401k and Roth contributions, etc. As such it’s been a few years since I’ve closely reviewed my finances. Everything has just kind of been on autopilot. So I recently took the time to audit my accounts. Kind of like stepping on the scale of the first time in years. I went through and conservatively estimated the value of all my assets, balanced my books, calculated my net worth, etc.
While my overall financial situation is good and improving I was a bit surprised how low my liabilities are. My asset to liability ratio is around 4:1. This is not meant to be a bragging post so I am not going to post actual numbers
Now, normally that would be a high quality problem but to me it seems suboptimial. With interest rates being so low it seems like it would make more sense to use debt to buy assets as an inflation hedge. Perhaps investment properties or undervalued stocks. Since inflation is effectively a transfer of wealth from savers to debtors those with debt will ultimately be in a strong situation.
Of course the alternative view is that debt is evil and risky and should be eliminated. There are lots of stories of individuals that went too far, too risky, and too aggressive with debt and got wiped out.
Does anyone have a target ratio that they use are using to balance their risk? I was hoping some of the longtime FWF members could share their own strategies, anecdotes, and rude remarks.
Money’s fungible. Unless the car is so low value relative to assets that it’s "not worth the time/effort, that’s the lowest fixed rate loan I had.
I’m at 9:4 assets:debt. House and margin loan are around the same size, house loan a little smaller… I’m not sure how useful this assets to debt ratio is, the home in particular is not very liquid.
I think scale probably matters in this discussion. My 20:1 could be an early retiree with a million in assets and a 50k mortgage, or a recent graduate with 20k assets and a 1k credit card balance.
The people who access the debt first and at lowest rates benefit the most. Real estate brokers, entrepreneurs, etc can also take very large risks for investment purposes and then on the outside chance that there’s a black swan event their entity just goes bankrupt and shields their personal assets, there’s really no downside.
*Since the beginning of monetary policy that favor it, loans and interest, etc etc.
4:3 or 3:2 give or take. That’s counting “notional” amounts for weird stuff like short positions or other complicated positions. Long/short should be lower risk, and this counts both sides notional amounts as positive.
This works great, especially when all the markets just go up like that couple years. Arguably you want to be more careful than this with borrowed money.
Buying on margin or overspending will both solve this “problem” :).
I think this is a difficult ratio to judge without actual numbers and the value of what you are leveraging. A real estate investor might be flipping or buy/hold with a 1:4 ratio and over a million or ten million in net worth and using a high debt to leverage their investments. A typical middle class American might be 1:4 when younger and buying their first house with under 100k net worth. I think a lot depends on your goals and risk tolerance. If you’re not leveraging business debt or real estate debt you should try to use a lot less leverage in general compared to your net worth.
I think your numbers are wrong, because you forgot to include the value of the asset that is purchased with borrowed money. When you borrow money to buy a home, your ratio could never be less than 1:1. If I put 100K down and borrow 300K to buy a 400K house and have nothing else, my asset:liability is 4:3 (or 1.33:1).
A ratio below 1:1 (such as 1:4) could only be achieved if your assets are under water (worth less than you owe) or you have much more liabilities than assets (like credit card debt with nothing to show for it).
While I agree with this, I don’t see much logic in looking at your asset to liability ratio.
Certain assets just can’t be borrowed against – there’s a 50k limit on 401k, I don’t think you could borrow against IRAs, and HELOC rates are usually variable. The only way to hedge is to buy real estate with a fixed long-term mortgage.
You mentioned buying undervalued stocks – do you mean on margin? And assuming you can figure out which stocks are undervalued? And be right? I don’t think this will change your asset to liability ratio unless you get it wrong.
I carry a small margin balance on my brokerage account but not much. Maybe like 10% margin… always low enough that I could come up with cash to cover it if needed and there’s basically no chance of blowing up my brokerage account. I would look to raise debt other ways.
I’m with you on KODK, also short WATT. Later today may provide a better entry for that. WATT produces PR hype and dangerous prototype microwave devices disguised as wireless charging systems. They are quite good at both, and have been doing it for years, but they’re more overvalued than usual recently.
