Debt Optimization Framework For Financial Independence

In order to achieve financial independence, you must properly manage your debt. Here is a debt optimization framework to help you do just that.

But first, let's discuss why we get into debt.

Why We Get Into Debt

Debt Optimization Framework For Financial Independence

Most of us get into debt because we WANT something we cannot afford. Instead of sending our kids to public school, we want a private school education. Therefore, we borrow $50,000 to learn something we can learn for free on the internet.

In our 20s, we want to live a fabulous lifestyle. Therefore, we put everything from fine dining to designer clothes on our credit cards.

In our 30s, we are sick and tired of paying rent. Therefore, we leverage up 7:1 to own a property that will crush our finances if we need to sell in a down market. Follow my 30/30/3 rule for home buying instead.

Taking On Excess Debt Is Mainly Due To Greed

Make no mistake about it. Debt is a manifestation of greed. Which means I'm one greedy bastard! I wanted to live a nicer lifestyle and I wanted to get rich as young as I possibly could. In my 20s and early 30s, the biggest risk I feared was not taking enough risk.

Some of you might be thinking you aren't greedy for having debt. But deep down, you know what I'm saying is true. Not only are you greedy, you're impetuous to boot. But don't be ashamed. If managed properly, greed can often be good when it comes to reaching financial independence sooner.

In this post, I share with you my debt history followed by a debt optimization framework to help you build wealth faster while minimizing the chances of a financial blowup.

A Stroll Down Debt Lane

With everybody in agreement with my debt type rankings, here are some key moments in my life when I could have gotten into debt or actually did get into debt.

College Years 1995 – 1999

I had zero debt because my parents paid the $2,890 annual tuition and $4,470 room and board which I've since repaid. I purposefully chose The College of William & Mary over a private school (~$35,000 all-in back then) because I knew that if I couldn't get a corporate job after graduation, even with a minimum wage job, I'd still be able to reimburse my parents quickly for four years of tuition.

Besides, William & Mary is a great school with small class sizes and a beautiful campus. I was humbled they accepted a kid like me because I didn't do well on my SAT.

The College of William & Mary Historical Tuition And Cost
The College of William & Mary was so cheap as an in-state student during my time.

NYC 1999 – 2001

I continued to have zero debt because there was nothing to buy and nowhere to go when you are working 70 hours a week. All I wanted to do was save money and sleep with the precious time I had left. The money I did spend going out was usually charged to my credit card which I promptly paid off each month.

If I could have afforded to purchase a NYC apartment, I would have gotten into a lot of debt. But with a base salary of $40,000 my first year and $55,000 my second year, I couldn't afford to buy a closet, let alone a studio.

SF 2003 (serious debt begins) 

At the age of 25, I was restless to change my life. I had several hundred thousand in the bank due to a lucky stock pick (VCSY went from $3 to $150 in several months) and aggressive savings. I was *this* close to leaving everything behind and moving back to Honolulu to work on my grandfather's vegetable farm.

Instead, I took on a $435,000 mortgage by purchasing a $580,500 2/2 condo in Pacific Heights. The condo seemed like a no-brainer at the time since it has a dead on park view that in Manhattan would cost well over a million. Overnight, I was reinvigorated to earn more money due to my debt burden.

SF 2005 – Bought a new house

I took on a $1,288,000 mortgage by purchasing a $1,520,000, 4/3.5 single family home. For some reason, I didn't fear taking on so much additional debt because I was being outbid on 2/2 and 3/2 condos that were being listed at $1.1M – $1.2M and being sold for $1.3M – $1.4M! For $120,000 more, I was getting an entire single family house in a good neighborhood that had four bedrooms, and three and a half bathrooms.

Yes, it was close to a busy street, but it was also the cheapest single family home I could buy in the north side of SF with this type of scale. The listing agent was from out of town and had listed the house during Christmas when many people were away. I smelled opportunity and went all-in with what I had at the time.

SF 2007 – Bought a vacation property with a mortgage

I took on a $560,000 mortgage after purchasing a $715,000, 2/2 vacation condo in Squaw Valley, Lake Tahoe. I thought I was getting a deal because the sellers had bought the condo for $820,000 a year and a half earlier. 

In 2007 I was at the peak of my financial wealth. Little did I know the housing crisis was right around the corner! As a 30 year old, I thought I couldn't lose. But on paper at least, I lost BIG TIME.

SF 2014 – Bought a fixer upper with a mortgage

After spending years grinding back all my losses and getting comfortable as an early retiree starting in 2012, I took on a $992,000 mortgage after purchasing a $1,240,000 fixer upper single family home. I was able to do so partly because a 5-year CD expired in early 2014, giving me the 20% downpayment and a 20% cash buffer.

I was again going through a “what should I do with my life moment” and considering whether I should go back to Honolulu to be closer to my parents, when I stumbled upon this house in San Francisco with panoramic ocean views listing for 40% less on a price/sqft basis than my northern SF home.

It made no sense the price would trade at such a discount, where everywhere else in the world, ocean view homes trade at a significant premium. I just had to have it. The property was in what I considered to be an “undiscovered” neighborhood that is just now going mainstream.

Total mortgage debt taken out: $3,275,000

Holy crap! That's a lot of debt to take on by age 37. Taken in isolation, $3.275M is an inordinate amount of money to borrow. But if you compare the debt amount with its associated asset values and my income, the debt figure seems more reasonable.

The total value of my real estate holdings is roughly $6M. Therefore, my debt-to-asset value ratio is roughly 54.5% aka Loan-To-Value (LTV) ratio. Today, many banks require a borrower to put down 20% on a property, thereby giving the borrower a 80% LTV. Thus in this regard, I'm well in the money.

Further, today, I don't have $3.275M in debt anymore. After checking my mortgage balances on Empower, my mortgage debt is “only” $2,089,550 for an even more reasonable LTV ratio of 34.8%.

Compare Debt Amounts to Equity And Asset Amounts

This means I've got about twice the amount of equity as I do debt. Within 20 years, I plan to get my LTV down to 0%, ensuring that I have at least a $6M net worth to pass on to my children estate tax free. Unless they are bad, in which case no soup for them.

Debt Optimization Framework - Financial Samurai Mortgage
Current total debt

The Lake Tahoe Vacation property is worth about $700,000 (54% LTV). The Marina single family home is worth about $2,700,000 (30% LTV). The Golden Gate Heights single family home is worth about $2,000,000 (45% LTV). And the 2/2 Pacific Heights condo I bought for $580,500 in 2003 is worth about $1,000,000 (0% LTV).

Based on my ratios, I'm not that leveraged. It just seems that way given the total dollar amount is relatively large compared to the median debt amounts Americans have.

The Value Of Debt

Here are some reasons why I'm not freaking out about carrying $2M in debt.

1) Nicer living arrangements. 

Although I recommend living like a pauper between ages 18 – 34 to achieve financial freedom sooner, after four years of crappy living arrangements after college, I had had enough. Since I was 26, I've lived in nicer places compared to what I would have rented because I had drawn a line in the sand at spending more than $2,000 a month for rent.

Today, it is rare for a 26 year old to live in his own 2/2 park view condo in Pacific Heights. The same goes for a 28 year old having his own single family home in a nice neighborhood. If I hadn't bought property, today I'd be super liquid. But I also wouldn't have been able to live as well I did for ~12 hours a day for the past 14 years.

Further, with the global pandemic, we're all spending a lot more time at home. Therefore, the value of our properties have intrinsically gone up. The larger and nicer our homes, the better.

2) Passive income.

My rental properties generate roughly $109,788 in rental income after all expenses and before taxes. Rental property alone can comfortably provide for me and my wife. Physical rental property is ranked in my top 3 best passive income sources.

Unfortunately, it's not enough to also cover the cost of raising a child in San Francisco comfortably. In late-2019, we were also blessed with a daughter. Therefore, we've been diligently saving and investing our money to try and generate even more passive income.

One one to generate more passive income is through real estate crowdfunding. The income is 100% passive and the net rental yields (cap rates) are much higher than in expensive San Francisco. As a result, I've invested over $500,000 in real estate crowdfunding.

Financial Samurai Real Estate Passive Income

3) Investment bet. 

To be able to control $6M in assets for only $2M at a blended interest rate of 2.65% in the cheapest international city in the world is a long-term bet I'm willing to take. Although San Francisco is going through a price softening now, I'm bullish that prices will be higher 10-20 years later.

I've been to many major international cities, and San Francisco is good value relative to the jobs and incomes available. For example, Vancouver is even more expensive than San Francisco, yet they don't have dozens of companies paying new college graduates $100,000+. Nor does Vancouver have the VC and startup ecosystem that helps drive innovation.

Besides seeing the data, I know these six figure income levels for 20-somethings to be true because I see the pay stubs of many tenant applicants as a landlord.

I absolutely believe that panoramic ocean view property in San Francisco is some of the most undervalued real estate in the world. The time to investing in big city living is now. When COVID-19 over, there will be a massive rush back.

Personally, I'm bullish on the west side of San Francisco due to a new school and hospital opening. In addition, the artificial intelligence space is booming, which should boost property values in San Francisco as well.

price-to-income and price-to-rent charts by city - Debt Optimization Framework
San Francisco has got so much upside potential

4) Debt provides perpetual motivation to earn more money and provide.

After experiencing 13 years of overseas living, life is relatively easy in America. If you don't believe me, take a trip to New Delhi and see what hardship really looks like. You can even go to developed Hong Kong and see how little you get in housing for your money. We've got it so good. No wonder most of us speak only one language and are out of shape!

If I had zero debt and $200,000+ in passive income, I'm SURE I'd turn into an aimless trust fund kid who decides to travel the world for a year after only putting in a couple years of work. Instead of publishing 3X a week on average for the past eight years on Financial Samurai, maybe I'd publish once a month instead. Instead of responding to comments and e-mails, perhaps I'd just ignore everyone!

Knowing there's $2,089,550 in mortgage debt still left to payoff keeps me focused on optimizing my finances. I could have quit building my passive income when it was generating $80,000 – $100,000 a year, but I kept going due to a desire to provide the best possible life for my family.

I view my four mortgages as my four kids. One has already graduated from college (paid off in 2015), with three left to nurture for the next 5 – 10 years. I won't stop optimizing my finances until all the mortgages disappear, and especially when a real life kid comes into the picture.

5) Total income can handle the load.

Everything is rational when it comes to finance. When someone proclaims they got into $70,000 of credit card debt and then paid it off in one year, it's simply because they had a high enough income for credit card companies to grant so much debt and a high enough income to press a button to pay it off quickly.

No bank would have lent me so much money if I didn't have a high enough income for a long enough period of time. Yes, from 2012-2013, I was vulnerable given I had just retired from Corporate America with a ~70% decline in income. But I still had assets I could get rid of to pay off all debt if worst came to worst. I used my debt as motivation to get back to where I was and beyond.

In 2024+, my passive income took a big hit because I sold stocks and bonds to buy a true forever home in 4Q2023 with cash. As a result, I'm technically no longer financially independent. My goal is to earn, save, and invest as much as possible until 2039 so I can return to FIRE. If I succeed, I will not only rebuild my passive income back to $380,000, but also have a paid off forever home.

Debt Management Is Important

Despite my reasons for embracing debt, I'm no longer planning on getting into much more debt. I'm basically borrowing 10X my passive income, which is way out of line based on a recommended 3X income debt maximum.

Yes, I've got a healthy online income stream from Financial Samurai due to the 1M+ organic pageviews a month, but such income, like Social Security, cannot be 100% counted upon for the long term.

Nowadays it makes more sense for me to invest in cheaper real estate projects around the country, refinance existing mortgage debt, and try to hoard as much cash as possible. I need to be prepared to survive through an extended down cycle given my debt level.

Given my expectations, I'm hustling now to create $1.2M in value and $22,000 in extra passive income before the pain occurs. The main way I plan to make up for such potential loss is by building my online business and generating extra passive income through real estate crowdfunding. With an 8% return, all I need is $275,000 in real estate crowdfunding to earn $22,000.

Total Debt Framework For Financial Freedom

We know that debt can help us get what our greedy hearts desire. But too much debt can also ruin our lives. Therefore, my Debt Optimization Framework takes into consideration age, income, asset value, and ability to recover from financial calamity.

I'll be using two ratios: Debt / Income and Debt / Asset Value to provide a guideline by age for an Aggressive, Moderate, or Conservative individual.

The chart is built on the following assumptions:

  • Each percentage assumption is the maximum recommendation.
  • Interest rates remain relatively low e.g. 2% – 4% on the 10-year bond yield for the next decade.
  • Student loan debt does not exceed 100% of annual gross income.
  • Debt / Income can't exceed 500% largely because institutions won't allow it.
  • There should be very little to no automobile or credit card debt after age 30.
  • Everyone buys a home between ages 25 – 35 to at least get neutral inflation.
  • Nobody has any debt left by age 60.

Debt Optimization Framwork Chat

Financial Samurai Debt Optimization Framework

The more I study the debt optimization framework chart, the more I like the idea of being completely debt free by age 45 (Conservative). But that's because I was so aggressive in taking on debt in my 20s and 30s.

Only folks with highly defensible and high growth salaries should consider going the Aggressive route. Otherwise, you may end up bankrupt and alone. If you are unsure, follow the Moderate route.

Ideal Debt Usage Scenario In Your Life

The ideal scenario is to aggressively take advantage of other people's money while young, get rich, and then pay back all debt ASAP. If you do this, everyday will feel like you're living off the house's money, literally and figuratively. After the age of 40, your appetite for risk will wane, especially if you have dependents. Therefore, take more risks while you're younger so you have more time to recover if things go wrong.

Used wisely, debt is a great tool to help accelerate financial independence. Once you control a relatively large financial nut for a low price, you can build a small fortune.

For example, my $6M property portfolio that costs $53,000 a year in deductible interest to control, will grow to $10M in 20 years if the portfolio grows by just 2.59% a year. Further, all the debt will be paid off by then. That sounds pretty darn good to me as I work on building other parts of my net worth in the meantime.

Please follow my debt optimization framework if you want to achieve financial independence sooner, rather than later.

How much CONSUMER debt do you have? (Excludes mortgages and student loans, but includes everything else)

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How much TOTAL debt do you have? (Includes mortgages, student loans, consumer debt)

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Pay Off Debt Or Invest? Implement FS-DAIR

Housing Expense Guideline For Financial Freedom

Debt Pay Down Recommendations

If you have expensive revolving credit card debt or other type of high interest rate debt, consolidate your debt with a personalized prequalified loan with a lower rate.

Check out Credible, a lending marketplace that has qualified lenders competing for your business. Credible provides rates for you to compare so you can lower your interest rate and save.

Average Personal Loan Interest Rate

Invest In Real Estate More Strategically Without Debt

To invest in real estate without debt, check out Fundrise. Fundrise offers funds that mainly invest in residential and industrial properties in the Sunbelt, where valuations are lower and yields are higher. The firm manages over $3.5 billion in assets for over 500,000 investors looking to diversify and earn more passive income. 

Another great private real estate investing platform is Crowdstreet. Crowdstreet offers accredited investors individual deals run by sponsors that have been pre-vetted for strong track records. Many of their deals are in 18-hour cities where there is potentially greater upside due to higher growth rates. You can build your own select real estate portfolio with Fundrise. 

I've personally invested $954,000 in private real estate since 2016 to diversify my holdings, take advantage of demographic shifts toward lower-cost areas of the country, and earn more passive income. We're in a multi-decade trend of relocating to the Sunbelt region thanks to technology. 

Fundrise and CrowdStreet are long-time sponsors of Financial Samurai and Financial Samurai is currently an investor in a Fundrise fund.

Debt Optimization Framework is a Financial Samurai original post. All rights reserved.

72 thoughts on “Debt Optimization Framework For Financial Independence”

  1. I’ve never seen it spelled out this way. You’ve, once again, provided us with a really useful framework. I don’t think I would be comfortable in that Aggressive range, but the moderate range could eventually be doable.

  2. Sam,

    You’ve mentioned a few times that real estate buying and selling transactions are too high these days. I think you know enough about real estate, finance, and technology and have enough connections to try to do something about this. What is the reason commissions are so high? Couldn’t you develop some online Fintech solution to bring the cost down?

  3. I’d love to hear that VCSY story. Not that there would be a lot to learn from it, but that’s cool!

    I think debt and real estate are extremely powerful. Most rich people don’t attribute much of their wealth to debt and real estate, but it plays a huge role even if they don’t realize it. If you didn’t leverage, you would have had much less real estate. With much less real estate, you might still be working right now.

    1. webbersworld

      “When I was 23 I got lucky, very lucky. No, a Ford agency supermodel didn’t decide to stalk me around Manhattan and show me off to her beautiful friends in case we didn’t work out. Instead, a $3,000 investment turned into $155,000 in two months. The stock was VCSY a Chinese internet company with a homepage consisting of a simple dial pad. I had no idea what the company did except for the fact that Internet + China in December 1999 sounded like a fantastic idea during one of the greatest bubbles of our times.

      VCSY went from around $3 to $6, did an inexplicable 20-for-1 stock split and then went up to around $9. In other words, it went from $3 to $180 pre-split and I had 1,000 shares. The stock’s move was one of the most ridiculous things I’ve ever seen as everybody I knew on the Street started piling into the name. I eventually got out of the stock at around $155 a share, netting a cool $153,000.”

      – See more at:

      1. Brian - Rental Mindset

        Thanks for digging that up. What wild times those were! I heard companies that had nothing to do with the internet would simply change their description to sound more internet-y to see a huge market cap jump.

  4. Duncan's Dividend

    Great post and a great way to give someone debt adverse like myself a coronary. I could not imagine being over three million in debt even though you have what would be defined as “good” debt since you are using it to generate more wealth. I too bought a condo in 2006 which has plummeted in value, but I rent it our these days and it’s slowly going to be worth it to sell it at some point.

  5. Oslerscodes

    My wife and I are each 4-5 years into our careers but 40 is not too far around the corner. We’ve accumulated a substantial “financial nut” in that timeframe and could retire in the next 2 or 3 years with the $200,000/yr income desired.

    Presently we have a low debt/income ratio (<43%) and low debt/assets as well (13%). Trying to figure out both a limit and comfortable future mortgage amount. Houses in the "dream house" range would put us in the 340% d/i level but still remain reasonably conservative from an asset perspective – 44% – although the dream house would presently represent 2/3 of the "assets".

    Concerned that we're pushing the comforts of our income, without substantial drivers to increase the active component, but why work so hard and earn this much without a dream house to live in – both enjoy our jobs and will probably slow down a little over the next 5-10 years but plan to keep going for 18 years.

  6. Hi Sam,

    Long time lurker, first time question asker. I wanted to get your opinion on my next steps.

    Long story short, over the last 3 years I have been able to pay off all student loans and purchase my first property (2br/1ba duplex). Currently living rent free as I have one of my good friends living with me in my side while renting the other half.

    I have about $15k in checking/savings. Would you continue to save up for the next down payment on a property, or should I pay off the remaining balance on my car ($10k)? The car is financed for 3 more years at a measly 1.7%



  7. Debt is a great motivator indeed! Everything really is relative. Debt should be embraced if it’s creating huge value.

    Also.. do you really think a 20% downturn in coastal cities is approaching in the near future?

    And doesn’t this go against what you’re predicting for Bay Area real estate from the upcoming tech IPOs? (Airbnb, Uber)

    1. I don’t think coastal city real estate prices will go down 20%, I’m just preparing for it. The high-end, those properties over 2.5 to $3 million is definitely slowing down.

      The lower end is done about 5 to 7%, depending on property type. I think buying this winter or during the slow months of next year could be a perfect opportunity right before the big IPOs.

      1. Ah thanks, Sam! Definitely seeing a decline in the high end luxury ($3M+) properties out here in NY already.

        Currently don’t have the funds to purchase a single/multi-family home in SF (the type that I think those cashing out on the IPO would like to buy), but was thinking about investing in a condo or smaller house (under $600k) in cheaper areas of SF (or Oakland/Berkeley). The rental income would be nice, but mainly banking on appreciation as there are better options for rental yields. Would you recommend against that?

        I am based on the East Coast so would be renting it out and have a property manager.

  8. Sam,

    Awesome post! Nobody really talks about debt…people usually just discuss assets. It is really interesting to see where your peers are at. Everyone is always trying to get ahead.

    For me, I am in southern California. I am currently a bit asset heavy in real estate.

    Real estate net worth 7.5 million across 4 properties, about 2.5 million of debt, 5 million in equity. I am currently 40 years old and am in aggressive accumulation mode. I am planning on purchasing one new investment property target price 1-1.5 million every year until I am 45. The plan is then to pay off everything as quickly as possible and retire by 50-55. At that time depending on the number properties and value of the properties I may role these into NNN investments and have truly passive income.

    I live in a very expensive part of town and my goal would be passive income of 60-70k per month

    What do you think?? Am I too real estate focused? I am spending a good part of my income on real estate ventures as opposed to Stocks and bonds. Is this wise? Should I diversify more?

    1. Hi John, I think shooting for a $60,000-$70,000 a year passive income is a great goal. Go for it! The one caveat is that coastal city real estate prices are slowing now, and the rental market is softening as well. Therefore, I would slow down in my coastal city real estate purchases and diversify into the heartland, we’re prop prices are much cheaper and the net rental yields are much higher. But this is what I’m doing, you’ve got to decide what’s the most comfortable for you.

      What do you do for a living?

      1. Sam,

        I agree with your assessment of coastal real estate prices. I do not think they are headed through the roof. I am just too chicken to invest in the heart land because it is not a tangible asset for me. I need to see touch and feel the property. I guess that is just my thing!

        Correction, I am shooting for 60-70k per MONTH, meaning passive income of 700-800k per YEAR. This is about 1/2 of what I currently make working. I am a specialty doctor with a very large referral base. I am not dependent on insurance. I just don’t want to work forever!! I am jealous of your retirement!

        Los Angeles is very expensive. Some of the people who work in my office make almost 100k per year.

        Honestly, I am not certain how some survive. I follow all the financial samurai rules for Cars, house, mortgage etc. I am adverse to take on too much debt and I spend less than 1/8th of my gross yearly income total.

        I think in a city like Los Angeles or SF you need to make a lot especially with tax rates north of 39% federal and 13.3% state…we are getting hammered on taxes.

        It is true what you say stealth wealth is common. I can’t tell you how many patients of mine have tens of millions in real estate and or stocks. In a metropolitan city it is common to meet many people that have net worths of tens of millions… I even have a few billionaire patients! It is a great way to make you feel poor!

        My current project is 1031 exchanging a 800k property to a 5-10 unit investment property. This will most likely involve putting in some capital as well as capital improvements. These types of properties in LA are about 2.5-4M for 5-10 units depending on the area.

        I appreciate all your posts!! I think they benefit people of all walks of life.



  9. Hey Sam!

    Really love your posts – this is a great one because I wrestle with this daily mentally.

    If you see this could you please provide some of your thoughts?

    I am in Startup Tech Sales in NYC so get paid decently and am geo-arbitraging rent in Jersey across the water. A mile from the riverfront – 1000$ a month one bedroom split with SO. 30-45 minute relatively unpainful commute.

    I have one investment Multifam in Hudson County with partners doing great returns and are having difficulty finding a second as everything’s heated up. We have money on the side waiting for this.

    Following your path and advice has aided me greatly, and I do want to start personally having my own home and building sweat equity while young. I would buy a multifam in NJ near NYC on a transitline. I know RE and am comfortable with minor renovations – I honestly want something productive like that to do on the weekends.

    My problem is my amazing rent! 500$ a month?!?
    Its too amazing! I dont even know how to do the math – thoughts?

    1. That is pretty amazing rent in this day and age! And if you don’t mind the commute, but definitely keep on renting!

      One thing to be aware of is that I spoke to many, many people who had amazing rent 15 years ago in Manhattan and New York City. Because the rent was so amazing, they never really push themselves to save a lot and buy a primary residence. Now when I talk to some of these people, they really, really regret not purchasing because property prices have doubled and tripled since then.

      So while you might save $10,000 a year and rent, you might also be losing out on $30,000 a year from prop price appreciation. It’s worth doing the math to see some different scenarios.

      There will be a time when you might want to live in a nicer place. That was my trigger for buying my own place. I couldn’t stomach paying more than $2000 in rent a month.

  10. We opt for zero debt. We paid off our first home in 17 years. Purchased for $72K and sold for $160K. Purchased our second home for $435K, paid it off after 12 years, 3 years ago when my wife and I turned 50. When we paid it off, it was appraised at $505K, likely worth more today with the tight market here in the heartland. A very similar floor plan home in my small neighborhood went on the market for $550K recently.

    We opened a home equity line of credit at 80% of the appraised value (~400K) to have in our back pockets for future income generating opportunities but haven’t leveraged it yet.

    The only debt we have carried was a mortgage over our 32 year marriage. Home equity is ~18% of our NW. Reason, we paid it off was peace of mine. Secondly, paying all that interest over time to the Bank even as small as it was after the tax credit is hard for me so I opted to pay off sooner rather than later.

    We view a home as a home first and then an asset second. I guess my reason for that stems from my childhood…my parents lost their home to foreclosure during the early 80’s when rates where at 15 to 18% for mortgages and we ended up moving to 2 different rental homes before I left on my own for college. I saw the stress on them and the toll it took on our family of 6, foregoing utility and sometimes food to make the mortgage…I didn’t want that to happen to my wife and two kids. No debt for me. I still work today but want the ability to leave when I have had with the rat race…getting close…very close and having no debt affords us that. I guess its your perspective and experience that drives your ultimate decisions on debt.

    Enjoy your Blog Sam … have been a reader now for 3+ years and have forwarded your site to my kids and many others. Appreciate it. Thank you.

    1. Thanks for sharing your debt story. It’s really great to hear from readers. Thanks for also sharing some of my post with your kids and relatives. That’s pretty cool.

      Like you, I have no regrets paying off one of my mortgages. It’s a worthwhile endeavor to achieve before certain age. Those are really gratifying as well. I plan to pay off my vacation property mortgage in five or six years.

  11. These are good ratio’s, but I do think that the total debt should exclude debt for income producing assets (usually real estate). For these, each should be looked at as far as LTV ratio with an absolute max of 80% and an absolute minimum of 0%.
    Investors should be extremely cautious about chasing cash on cash w/ 80% leveraged property as the risk is great. For more conservative income producing property 40-60% LTV can provided significantly enhanced cash on cash for very little increased risk. The key is getting the right loan terms that limit risk (interest rate, balloon, refinancing etc)

  12. Hi Sam,

    Great, detailed post. I have a few questions as I consider my first real estate purchase. Firstly, if I’m understanding the debt / asset value equation properly, you are considering a conservative approach would be coming up with 40% down payment on a properly at the age of 30 (to meet the 60% asset value?). Or is it in fact find to substitute net worth as someone mentioned above. Personally, rather than sell off assets held in a non-registered account to try to hit close to that number, I’d be tempted to put less down, say 10% and keep the rest in investments. Wouldn’t this be a better alternative? This keeps me much more liquid and able to take advantage of other opportunities.

    Next, I’m Canadian and looking to invest in Calgary, Alberta as a primary residence. Many people shun condos in terms of investments as it seems they grow much less attractive with age as appose to single family houses. I see this now, when looking at Condo buildings from the 90s vs the late 2000s and later. The latter are much more appealing to me. I recall you saying on a number of occasions that you buy with the intention of holding on to it forever. How does this relate to condos? The prices of condos pushing 20 years old, even when renovated nicely on the inside, are markedly cheaper even in prime areas of the city.

    For this reason I’ve considered a single family house. However, being very close to the core of the city is important to me so this would be stretching me much thinner. But if there is potential for a much more significant capital gain, then it would be worth it in the longer run. Any thoughts on Calgary? Very much tied to the Oil industry, SFHs have been fairly flat for the last 2 years, and condos have come down a bit in price. However, the income / price ratio is fairly favorable for a large city in Canada. I don’t want to buy into a housing bubble but that seems more limited to Toronto and Vancouver in my eyes though analysts often generalize and say “Canada”. I do want to expose myself to real estate but haven’t yet due to my current city of residence not being somewhere I wanted to tie myself to.
    Appreciate any insights.

    1. I have no insights on Calgary, and I’m not very bullish on oil prices. Buying a single-family home is superior to buying a condo.

      From an American’s perspective, Canada feels like it’s in a big bubble. We just don’t see one large being in the streets or that can support these prices, given the oil market remains depressed.

  13. I’m down to just about half of my current mortgage (here in the heartland). I’m pretty happy with that, since I’m in about 4,000SF on 5 acres with part of a lake . . . for less than $250,000. Way less.

    I blame our low housing prices on our low cost of living and laid back lifestyle. Oh, and our short commutes.

  14. In paying down debt at an early age, I think a note should be made about the tax implications. If you are currently in a high tax bracket due to w2 income, rental property net income is likely going to be taxed at a higher level than when you are retired and no longer have w2 wages. Paying off rental mortgages with tax deductible interest now limits your capital and the ability to continue investing. It maybe better to delay paying off mortgages on rental properties until closer to retirement age. Of course if your income is primarily passive abd taxes at 15% or less then this would not apply.

  15. Everyone here has something valuable to add, so I’ll just answer the end question and cement myself as the Non-Contributing Retail Banker.

    Currently I have zero debt, but I’m going to have roughly $100,000 in mortgage debt soon. Once I go through the mortgage process. Buying a co-op. Wish me luck!

    ARB–Angry Retail Banker

  16. Brandon Wood

    It would be a lot easier to have limited to no debt if we all “got luck on a stock and suddenly had a few hundred grand”…. Not saying you havn’t done amazing things or that I don’t love your blog I am just saying..

    1. Yet here I am with $2 million in debt. I wish I was luckier!

      I attribute a lot of things to luck. From getting into the College of William and Mary, to getting a job in finance, to starting Financial Samurai in 2009, to buying a fixer in Golden Gate Heights in 2014.

      These are the true lucky breaks. My stock win in VCSY is much smaller in comparison.

      What are some of your lucky breaks in your life? Part of the reason why I continue to try so hard is because I recognize all my good fortune, and I don’t want to take it for granted.

      I think you’ll enjoy this post:

  17. Your First Million

    Debt is one of the greatest tools of all time. I think the problem is that most people do not understand how to use debt properly. Debt, when used as financial leverage in acquiring income generating assets, can offer you better returns on your investments. It can allow you to control assets that you normally wouldn’t be able to afford to control.

    For example, in what world would you be able to buy a $1,000,000 for only 25% of that price? With $250,000, you can own an asset that generates a monthly income (even more monthly income than you’re payments on the debt!) that is valued at $1,000,000.

    Leverage can allow someone to build wealth at much greater speeds than without debt. Learn to harness the power of debt to acquire assets, and avoid using debt to purchase things that depreciate in value and do not generate income.

    “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” -Archimedes

  18. No debt right now. Buying a place in silicon valley soon with the squeeze. Likely 1mm in debt over 30 years. Using existing 1mm portfolio to service the debt. Probably lockng into interest rate for 30 years at no more than 4%

    1. Early 30s couple. Looking at 1 or 2 kids. It’s not even a financial decision but more parental instinct more than anything else. Houses are money pits. Squeeze wants to renovate. Projects galore. Please advise what to look for when hiring a trusty Reno contractor

  19. Ms. Conviviality

    I’m 37 and I’m on the mark with being aggressive at 275% debt/income and 88% debt/asset. The percentages were lower earlier this year but I had an opportunity to get 41% returns on the secret investment I commented about on another of your posts. I applied for a $20,000 Prosper loan and a $16,000 Lending Club loan at the same time and got approved for both. At 12.50% and 10.02% APR, respectively. Arbitrage is totally working in my favor! How’s that for a real life example of how debt can be an enabler for wealth?!

  20. Hi Sam,

    I just saw your dark sides to a early retirement article on the first page of Yahoo. Congrats!! If you keep this up we will have to refer to you as Mr. Samurai!

  21. Stealth Saver

    Will you be able to resist taking on more debt by purchasing another property if this 20% or even 10% correction comes to fruition? I’m sure there will be some great property deals during that time.

  22. Hmm…rough numbers

    Ages = ~35

    Debt/Income = ~2

    Debt/Assets has a small decision point. With my pension it’s ~26%, but without my pension it’s ~38%. The second number is probably more accurate as I can’t actually cash out my pension (though my confidence in it is quite high).

    So we are conservative to moderate depending on what you’re looking at. It makes sense to me, though. I know where my comfort level is (leaning toward moderate) and I’ve been willing to stretch just a little further lately as our debt has decreased significantly due to transferring some money from cash to pay down loans.

  23. Interesting stuff. I’m just too nervous at using debt as leverage in order to get more gains. I don’t even have a margin broker account, lol. I agree with your “nicer living arrangements” value of debt reason #1. We generally are at home on the evenings and weekends and when we are sleeping. So a good portion of our lives are at home. At a certain age, and if we need to acquire some debt, why not live in a nice home plus property unlike a car appreciates in value over time. Of course, this may not make sense for people who have to travel for work all the time.

  24. We are currently off the chart conservative. <100% and 30 years old.

    I keep going back and forth on getting a rental property. Perhaps I should take a touch of risk and at least get myself on your chart before I'm 35.

  25. Young and Finance

    Debt agreements should be entered into with the same amount of thought we use to enter into marriages (hopefully we use alot), because once you’re in, it’s not as easy to get out.

  26. Readers, what is your current Debt / Income, Debt / Asset Value, and age?

    My current debt, total, is $209,418, all home mortgage. Of course the value of our house is somewhere around $480,000. I am embarassed I have so much home equity. Since my parents had to sell their house under duress, I always thought of a home as an asset, that if paid off, couldn’t be taken away by the bank. Luckily age, my education, and maturity led me to come to my senses and invest more instead.

    Our total investment value is roughly $1,012,704, but who’s counting? My age is 41 and my wife is turning 40 soon. Last year we refinanced our mortgage into a 2.89% 30 year ARM. Our total mortgage is now 38 years total, and I am very excited about that. That is a shockingly low expense to finance other investments. Plus, the house is in Nashville, which is a boom City in the Heartland of America. The housing market here is like Austin. It’s bad, for buyers, but just seems to keep getting worse.

    I am very proud of your debt FS, you have done well.

  27. According to your chart for debt/income (I used AGI), we are between conservative and moderate, tending closer to conservative. For debt/asset, we are pretty spot on for moderate. We only have the one house, the one we live in. All our other real estate holdings are via Vanguard REITs, VTSAX and Fundrise.

  28. I always get excited when you post charts Sam!

    Thanks for another great article.

    I was wondering, and sorry if that was explained and I misunderstood, what should be the ratio between the debt you take on and your net worth?

    For example, I’m currently saving cash for a down payment on a first rental property, as well as investing in the stock market.
    When I will have enough to buy this first property, should I make sure that I don’t get to a negative net worth by getting a mortgage (e.g. 40k) bigger than my stock market investments (e.g. 10k)? Should I wait to have more assets?

    I’m still a beginner but learning a lot thanks to your website!

    Thanks for the invaluable information you provide here :)


    1. Hi Claire,

      Thanks! It’s much easier to write when you write from experience. You don’t have to make anything up or pontificate this way.

      You can view Net Worth = Asset Value in my chart.

      Your net worth won’t go negative by buying a property. It’s just a transfer from liquid savings into equity. For example, let’s say you have $100,000 cash as your total net worth. You buy a $250,000 home, putting $50,000 down and have a $200,000 mortgage. Your net worth is still $100,000. It’s just divided $50,000 in cash and $50,000 in home equity.

      I recommend coming up with a 20% down payment AND having a 10% cash buffer before buying. Depending on where you live, there is no rush to buy (on the coast). In fact, there’s never really a rush to buy. Instead, figure out whether you plan to stay put for 10 years. If the chance is greater than 70% realistically, and you have the 30% of the home value in cash, then you’re probably going to be OK.

      Good luck!


      1. Sam thank you so much for answering me!

        I guess I didn’t get it right before, to me it seemed like 50k (home equity) + 50k (cash) – 200k (mortgage) = -100k net worth

        Do you mean that I shouldn’t consider a mortgage as a negative in my net worth calculation?

        And thank you for the advice on having a 10% buffer!

        I’m really thinking about building a giant word doc with all your charts!

        It gives some serious guidance and motivation.

        1. Claire – Don’t forget the value of the asset (the house). Purchasing an asset is, essentially, a net-worth-neutral action (assuming you buy the asset at it’s actual value). If you buy a $250,000 house, you now have a $250,000 asset on your balance sheet. It’s balanced down to $0 (neutral) in your net worth because you reduced your cash balance by $50,000 and you increased your debt by $200,000.

  29. “We want a private school education so we borrow $50,000 to learn something we can learn for free on the internet.” I love that statement because there’s so much truth to it. I’ve been debt free for almost 3 years after paying off the rental property. After 3 years, I just don’t think about it. I don’t like any kind of debt (mistakes from younger self left a bad taste in my mouth) and would only contemplate getting into it for investment purposes.

    When you say that you’re mentally preparing for a 20% correction in coastal city home prices, are you referring to the West Coast alone? Thanks for sharing! I enjoyed your article.

    1. I’m referring to the coastal city property markets like NYC, Boston, SF, LA, SD and to a lesser extent Seattle since it’s “catching up” with the bigger coastal cities.

      I don’t think we’ll see a 20% correction. More like a 10% correction and then flatline for several years. But I’m preparing for a 20% correction by hustling now to make up for the potential loss.

  30. Hi Sam,
    Thanks for a great, timely posting! I recently changed my strategy and went from a fully paid off house (I also have 3 rental homes with mortgages) to using the equity in my home to fund private lending investments averaging above 8% with 1st lien positions. I don’t understand why you’re deciding to pay off your low rate loans and potentially lock up your cash since you also mention in the end of your article the benefits you’ve seen in leveraging the bank’s money to build both equity and passive income: “…my $6M property portfolio that costs $53,000 a year in deductible interest to control, will grow to $10M in 20 years if the portfolio grows by just 2.59% a year.” I understand the desire to stash your cash away “safely” in a property you don’t have to make payments on, I have the same inclination, but don’t you view this as wasted potential? You could easily get twice the return than what you’re paying the bank and could then pocket the difference…using their money! =)
    I’d love to hear why you made the choice you did since I’m in a similar position.
    Thanks for another great article! -Jason

    1. Hi Jason,

      No problem. Sometimes assets go down. I’m attacking my vacation property mortgage that has a 4.25% rate first.

      “Despite my reasons for embracing debt, I’m no longer planning on getting into more debt. I’m basically borrowing 10X my passive income, which is way out of line based on a recommended 3X income debt maximum. Yes, I’ve got a healthy online income stream from Financial Samurai, but such income, like Social Security, cannot be 100% counted upon for the long term.

      Nowadays it makes more sense for me to invest in cheaper real estate projects around the country, pay down existing mortgage debt, and try to hoard as much cash as possible. I need to be prepared to survive through the down cycle given my debt level.

      I’m mentally preparing for a 20% correction in coastal city home prices, similar to the last downturn. In other words, I expect my property value to decline to $4.8M from $6M, leaving me with a LTV of 41.6% from 34.8%. I also expect to see rental income decline by a similar magnitude to $88,000 from $110,000.

      Given my expectations, I’m hustling now to create $1.2M in value and $22,000 in extra passive income before the pain occurs. The main way I plan to make up for such potential loss is by building my online business and generating extra passive income through real estate crowdfunding. With an 8% return, all I need is $275,000 in real estate crowdfunding to earn $22,000. I’ve currently got $260,000 invested so far.”

      At what age did you accumulate your first property and how old are you now?


      1. Hi Sam,
        I think I understand. You’re coming from a place of ensuring that your income can continue to pay for your debt. Since you’re already FI, I would also try to minimize risk to ensure you never have to go back to work. I’m coming from a different place. I’m still at least 4 years away from FI and looking for methods to safely increase my passive income so I can reach escape velocity. =)

        Allow me to pose another question: You mentioned that you’re exceeding the recommended 3X income debt maximum, but who made this recommendation? I’m wondering if this recommendation was based on an average saver with a job that could be lost with income dropping immediately to $0. I believe your income is more stable because you have multiple income streams, and most of it comes from rental property. Even if your rental income drops, it won’t drop to 0% immediately, people still need a place to live. I wonder if this changes the income debt recommendation formula…

        A bit more about me: I live in the Seattle area and bought 3 rental properties back in 2005 when I was 32, I’m now 43. They’re finally providing some decent cash flow of about $1100/mo (as well as appreciation, but I don’t care as much about that). My private lending is bringing in about $3400/mo now, but I plan to do more and bring this up to about $5000/mo. I’m only comfortable doing this because I get 1st liens on these properties and can turn them into rentals if the borrower defaults.


        Thanks again!

          1. webbersworld

            I think you mis-read his post Sam. He was 32 when he bought the three properties. He’s 43 now.

  31. Jack Catchem

    Hi Sam,

    I like your debt guide! My own plan is to be a millionaire by 40 (no debts outside mortgage) and be entirely debt free and financially independent by 50. Even if I don’t retire then (I love policing like kids love capes) I think it’s better to be ready to retire and not than the reverse!

    Also the ability to walk away is a sweet spot for anyone’s career. My Marine Corps career ended spectacularly when command tried to bully me into switching to a different unit. Instead I walked out the front door as they looked on like “he can’t just do that, can he?!” (I could BTW). :)

  32. Has smaller town investing crossed your radar? You have a personal knowledge of the SF area, and I know you are investing with crowdfunding in heartland. Do you have any thoughts on volume via small towns though? For example, a lot of smaller towns have beautiful houses and land for pennies to what you’re use to paying. You’d have to compare risk-reward and each real estate investments won’t return high $ amounts, but the return % may be higher than an area like SF due to the money put in. Your personal geographic situation might bar you from getting properties that you can manage with this theme. That return % could be marginally higher though given initial costs. For example $100,000 homes that could be rented at $900/mo, makes about an 11% current yield

    1. Hi Matt, I just can’t get myself to invest in other properties where I have no edge. Therefore, it’s best that I don’t put Money to work in small towns. I’m willing to pay a fee to invest in real estate crowdfunding with sponsors who do have local area expertise. Further, I just don’t want to deal with managing people and physical properties anymore. It’s just too much of a pain now that I’ve got two rentals to manage and a vacation property which is completely outsourced. I’ve hit my limit!

  33. Daaaayum!

    While I really like the idea of having a solid real-estate-fueled income stream, I doubt I’d be willing to get into that much debt. Probably a good idea, too, since if something happened my ability to pay it back with my less-than-stellar income wouldn’t be very good.

    I’ll stick to cheap properties in the Midwest (probably in my Michigan hometown since I know the area) if and when I do dip my toe in real estate investing.

  34. one more year

    I’m trying to run my own ratios to compare, but not exactly tracking.

    Does dept = mortgages + consumer loans + student loan etc? I have 3 mortgages and a 1% interest car payment, no other debt. Is this my debt picture?

    Income – Is this gross or net? I was using net plus 401k contribution and am at 480% for a 35 year old.. seems too high

    asset value – is this non-liquid assets only? Is this property values or property values plus 401k balance, liquid savings, stocks, etc?


  35. Thanks for this post. As a young adult, It’s really hard to fight lifestyle creep but I’m learning through self awareness and consuming content like yours. There’s great value here

  36. Thanks for sharing your debt history. It’s interesting since unlike most people in debt you seem to be using debt as leverage to increase returns via rental properties. We currently have a insignificant car loan at 0 percent chosen to maximize return. Beyond that my mortgage is significantly less then my salary. I’m actually debating doing a bit like you and buying some rentals. Im waiting for better timing or a better market then my local to do so.

  37. I’m surprised you had all that information, especially what you college cost! I have no idea what my consumer debt history is, but it only involved credit cards and car payments. I think I’ve been a little too chicken to get in on real estate. Interesting post though!

  38. I pay off my credit card balances in full every month so the only debt I have is mortgage debt. I simply don’t feel comfortable making any type of purchase that I don’t have the cash flow to pay for within 30 days. There’s also fortunately nothing super expensive that I want or need. As for mortgage debt I try to make extra principal payments several times a year, especially during months when there isn’t something I want to invest in, and it feels great tackling the balance a little bit extra at a time.

  39. Thanks for sharing your debt history! Your story is definitely relateable and inspiring. I totally agree with you that we get into debt to buy something we can’t afford. It can be greed. But it could also be a form of investment. We live in the DC area, and it would take us at least 10 years to save up enough to buy a house with cash. We decided to buy a house on the cheaper end and save like crazy to pay it off, which we will be able to do in a couple of years.

    It’s great to see how your mortgage has decreased drastically over the past few years!

  40. This post is interesting, there is a great home I want to purchase which is around 1.25 million, could probably get it for 1 million, have enough for the 20% down payment, but we only make about 200K combined (ages 32 & 30)… it will be a bit of leverage now, but I feel 5 years from now we can easily cover and lower our ratios… decisions decisions!

  41. The Green Swan

    Very nice to be able to follow your debt journey. It’s a great firsthand for those just starting out or wondering what their true value of debt would be. Taking on debt is something that would be ideal to avoid, but if you truly lay out your debt value it’s worthwhile for certain situations (your life )is a perfect example of how debt assisted you). Also, surprised to hear you didn’t do well on the SAT, but then again that didn’t seem to stop your success in life :)

  42. Thanks for sharing your experiences with debt Sam. I appreciate you diving down deeper into the nuances of debt as well. In this interest rate environment figuring out ways to have a positive carry isn’t too hard. But should that change (and at what rate) many may run into trouble. Thanks again for your perspective!

  43. Charleston.C

    Thank you for posting so early in the morning, early enough that when I get to work at 6am on the east coast it has become my morning coffee routine to check out FS and have a positive, financially logical mindset to tackle my day. It is always astonishing to me how spot on your charts and guides are whether its for above average net worth or in this case aggressiveness to debt balance.

    I am curious how you are able to convince the banks to lend you the money for a 4th mortgage. I am young (30 y.o.) and bullish about my career (like all 30 y.o.) but is having a tough time to taking on more mortgage debt because a second mortgage would on paper put my over the 43% debt to income ratio, even though the numbers all work in my favor in the sense that 75% of rental income (to account of vacancy) would more than cover mortgage, tax, and maintenance, plus about 18 months worth of mortgage payment saved up in a rainy day savings account. In another words there is no doubt in my mind I can afford another mortgage.

    The first 3 properties you bought were all before the financial crisis, so I can somewhat understand if the lending practice was less strict back then. But in 2014 you manage to take on another million in debt by putting 20% down, that is truly a head scratcher for me as to how you manage to pulled that off especially since you have already early-retired at that point.

    Sorry if the question is too personal about your finances, any pointers would help.

    1. Sure. The bank called it “asset based lending” I believe, when they approved my mortgage in 2014. So even with another mortgage, my assets were large enough to be approved under their standards. My current loan-to-value ratio is ~35%, that is very low compared to the typical person who has a 80% LTV after putting 20% down.

      It was difficult for me to refinance in the past after leaving Corporate America, and it was also not easy to get a loan. They only used 75% rental income amounts and didn’t include all my 1099 income either. But in 2014, I had already been grinding on my online business for five years and started making a decent amount of income by then.

      What is your current Debt / Asset value ratio? This is a key point in my post at the end, which I fear may be lost because the post is so meaty. Also, what is your income and total debt amount currently? It’ll be easier to answer your questions with these details.


      What It Took To Successfully Refinance My Mortgage

      Increasing Passive Income Through Leverage And Arbitrage


      1. Charleston.C

        Debt to asset: 60% if I consider my current property value to be the purchased price (very conservative estimate). Market value would put my debt to asset ratio at low 50%.

        Income to debt: $97,000 base salary, including bonus and rental income using the past 3 years as reference would be around $120,000, with $380,000 in mortgage debt (no credit card debt, no car loan, <$5000 0% interest in student loan). In another words 400% if I assume base salary only (conservative estimate), if the trend of bonus continues as expected, and my existing rental continues to bring in income the same way it has been for the last 3 years, the ratio is 325%.

        My calc. is telling me I can purchase another multi-family within my financial comfort zone, since the 3 or 4 family properties I've looked at are cash flow positive, in addition to being able to cover 18 months of mortgage if it's vacant. My salary income can support the new mortgage if need be, since my existing mortgage pays for itself with 75% of current tenants.

        But when you do the math on paper, monthly debt to income ratio is over 43% because debt will more or less double, but my income will only grow to cover the cost of new mortgage instead of being doubled. So the only plan I see is to save more and borrow less, unless I'm missing something.

    2. Check local credit unions for rental properties as well – they frequently have easier underwriting.

      Also If the place you are buying is already rented and has a rental history, the lender may do the net rental calc for the debt to income ratio (ie mortgage of say $2k, Rental income of $2.5k * 75% = $1.875k only counts as $125/month debt on the DTI, not the $2k) and it may not hurt you at all.

      1. Charleston.C

        Thanks. I will certainly try. Good call about local credit unions as well, perhaps the underwriter will have a better understand of my local market where rental in high demand thus less risk , instead of someone from a national chain trying to assess my risk without from many states away without local knowledge.

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