When you invest in an asset, and you have all of your money in that asset, it means that you have no leverage.
Since you have not financed that asset, it is a free and clear asset, and is producing you some type of return on investment (cash flows, royalties, dividends, interest, etc.).
But you have to ask yourself: what is my real return on equity, and what is the value of that asset?
Let’s focus on real estate, one of my favorites.
You might have a free and clear property, and maybe you originally financed the property and leveraged it, which is very common in real estate.
(The proper use of leverage is a great way to build one’s estate.)
Now, you have paid off that property, and it is free and clear.
It could be a commercial asset or a rental property; it doesn’t really matter.
You then have to ask yourself, what is my net return per year, divided by the actual value of the property?
The equity and property value have probably gone up.
That is good, and that is what real estate does.
But at some point, it might make sense to recapitalize, refinance, or to take cash out of that equity, and put it back to use again.
Essentially, re-leverage it.
Leaving equity that is lazy, and is not working hard for you, is a waste of resources.
The idea is to compound your money and grow it faster.
If you are comfortable and have all that you need, then don’t go back into debt.
But, debt can be your friend if you are trying to make up for lost time.
I have a friend who got involved with Freedom Founders, and he made some fantastic investments. His investments have increased by multiples, and he has done very well for himself.
His principle is coming back, which means he can now get his money out.
It’s a safety factor for him to get his money back into his hands.
It’s called risk aversion.
But my idea is, why doesn’t he take the fruits of his labor, get it back out into the market, and work it again?
Why would he put his capital back in the bank, where he can only get 1-2%?
The bottom line is, if you already had great success in an asset class, then you should keep your money working.
That is the philosophy of money…
Turning that money.
That is how you build momentum, equity, net worth, and cash flow.
Don’t let your equity sit idle; that is what I call dead equity.
Needless to say, you don’t want dead equity.
Going forward, inflation is going to eat up a lot of those cash flow returns.
You have to keep pace with inflation (and beat it), in order to sustain and grow your wealth.
As you invest going forward, always look at your recapitalization and your return on equity.
To learn more about making your money in investments go further, check out our upcoming webinar: www.freedomfounders.com/webinar