Why I Just Lost $4,000,000

What's up guys, it's Graham here. So here's the deal: despite me saving the vast majority of my income, reading all things personal finance, and trying to be the best example to everyone who watches my channel, I'm four million dollars in debt. Initially, this is a number I never thought that I would find myself with, but over time, I began refinancing my properties. I began to take out as much money as they would give me. I began to take out car loans because it was more affordable, and before you knew it, I'm here.

Everything is fine. All right, in all seriousness, I know I get some criticisms for these choices, and frankly, I think some of it could be justified. After all, growing up, I was taught that debt is irresponsible; credit cards are bad. With household debt recently approaching an all-time high, it's a real problem for a lot of people. So let me set the record straight to explain why I'm not paying off any of these loans early and then how you could use a similar strategy to make money.

Although before we start, I do have a confession to make: I am in debt to the like button, and the only way to pay it back is by giving it a gentle tap for the YouTube algorithm. Okay, but really, hitting the like button or subscribing does help out the channel tremendously, and with the new update, the like button now has confetti every time you hit it. So thank you guys so much for doing that, and also a big thank you to Truebill for sponsoring this video, but more on that later.

All right, now even though some of you might understand the nuances of what I'm talking about and grasp the bigger picture, unfortunately, most people do not and instead just focus on one single word, and that would be debt. Our culture has made it so easy to purchase just about anything you would ever want with one click of a button, even if you can't afford it. It's this instant gratification of being able to buy a brand new car, but not because it's seventy-one thousand dollars, but because it's zero dollars down at 999 dollars a month. We're taking vacations and seeing all the places you've wanted to visit because, hey, it's only 120 dollars a month for the next five years on a credit card.

After a while, it's easy to become desensitized to the price tag of an item because, as long as you can afford the monthly payment, what difference does the upfront cost make? In fact, this new business model has become so popular that buy now, pay later companies like Affirm have partnered with Amazon, with 74 percent of participants now having used it, with 82 between the ages of 25 and 34. Even though a third of users have difficulty keeping up with their monthly payments, it's still more popular than ever, and the mindset seems to be it's not a big deal as long as I don't fall behind, right?

Well, there are some consequences to that. Does credit card debt hit an all-time high? New car payments increased by 12 percent. The average student loan debt ballooned to thirty-nine thousand dollars, and top it all off, it's now about to get a lot more expensive with interest rates increasing. So how do you fix something like this, especially when the average credit card interest rate is already over 18 percent?

Well, for most people, their solution is simply the belief that all debt is bad; you should avoid it at all costs, no matter what. But for my own debt, I take a completely different approach, and I can't help but feel that there has to be a better strategy out there when it comes to personal finance, building wealth, and making money. I generally see two categories that people tend to fall into.

The first believes that all debt is bad. They'll avoid it at all costs, still pay down their loans as fast as possible, and they want to preserve what they have. Now, even though it's a very safe strategy, if they don't optimize all of their available options, sometimes they'll wind up with less. Now, the second type of person embraces debt; they don't bother themselves with paying it off early, and they just want to squeeze out as much value as possible, even if that means taking on a higher risk for a slightly higher reward.

However, as anyone will tell you, it's usually not a good idea to go too close to either extreme. So, to me, here's my philosophy behind it: if holding on to debt does not make you money, then always avoid it. Or if buying something is not going to make you anything, then always buy it if you could afford to pay for it outright. But on the other hand, if having debt is going to make you more money, then sometimes do it. And if buying something can make you more money, then it's okay to finance it, but only every now and then.

I know it sounds kind of confusing, but here's what I mean by that. Just like we accept electricity in our day-to-day lives, we still avoid sticking our fingers in the electrical socket. Or just like most of us drive a car to and from work, we avoid launching it off the hill for YouTube views... wait, never mind.

Anyways, you can see there are some fundamental differences between the right and the wrong way to use debt, with very little in between. So when it comes to myself, here's the strategy that I most closely follow and why I owe four million dollars. Although before we go into that, as a self-diagnosed personal finance nerd, I need to address a recurring question: what software do I personally use to budget my money, keep track of expenses, and make sure that I don't get too carried away with all-you-can-eat sushi?

And the answer just so happens to be the sponsor of today's video, and that would be Truebill. They're an all-in-one finance app that gives you a complete snapshot of your entire financial history, from bank accounts, credit cards, subscriptions, and anything else related to your money. No joke, I've been using them on a daily basis with email reminders, and they show me all of the information that I otherwise would have missed.

One of my favorite features is that they allow you to identify recurring charges, and then once you see everything that you're subscribed to, you could cancel anything you don't need within the app with just a quick tap. It'll even help you lower your bills; all you got to do is upload a photo, and then from there, they'll negotiate on your behalf to bring it down and save you money. On top of that, Truebill is loaded with even more features to keep track of your monthly expenses, get notifications when you spend too much money, monitor your credit score, and get insights on ways to improve it, and set up an automatic savings fund that you can withdraw at any time.

So if you're interested in learning more, checking them out, or most importantly, saving more money, feel free to use the link down below in the description or visit truebill.com/gram. And now, with that said, let's get back to the video.

All right, so when it comes to myself and my overall debt, even though I do use credit cards for every single thing that I buy, I always pay them off in full by the time they're due. So that way, I don't owe a single penny in interest. Even though I bought a Tesla and financed it a hundred percent, it made sense because I could borrow money at a cheaper interest rate than I could make investing. Even though I borrowed four million dollars in mortgages, I know that's worth more not being paid off than it is to pay it off, even though I have the capability of doing so.

The strategy behind this and why I focus so much on accumulating debt is very simple: it's the act of borrowing money at a cheap interest rate to invest it at a higher interest rate, and then you profit the difference. For some people, it's hard to understand because, yeah, it's not my money; I owe it back. And of course, I have to pay it back with interest. Even on my four million dollars of debt at a three percent interest rate, I have to pay back six million dollars over 30 years, essentially costing me an extra two million dollars. So it's easy to see why so many people are against it.

But the way I see it is that I would much rather pay back six million dollars thirty years from now than four million dollars today. And to break it down a little bit more simply, think of it like this: if I offered you a hundred thousand dollars today and I wouldn't charge you any interest, would you take it? I would venture to say that everyone would say yes, because even if you put it in the savings account, you could earn a risk-free half a percent with basically no work.

But what if I said I'll give you a hundred thousand dollars but charge you a one percent interest rate? Would you take it? Again, I believe that almost everyone would say yes, because if you are able to average four percent market, you have to pay back one percent, and you still make another three percent profit.

Okay, but what about a hundred thousand dollar loan at a four percent interest rate? Well, this is where strategy comes in, because if you invest it four percent in the stock market and you break even, it's not worth it, and you expose yourself to unnecessary risk. However, if you were to put that hundred thousand dollars in a rental property earning seven percent, then it is worth it, and you get to make a three percent profit.

But now, what about a hundred thousand dollar loan and a ten percent interest rate? Would you take it? To me, this is the point where it pays off not to take it, because when you compare that to a safe return that you could make anywhere else, you begin to see that you're getting pretty darn close to putting your finger in that electrical socket.

This is where you need the knowledge and the self-awareness to ask yourself at what point does borrowing money simply become too expensive and not worth the time and the risk? For me, my debt consists of a thirty thousand dollar loan on my Tesla Model 3, four mortgages across four rental properties averaging a three percent interest rate, and one mortgage on the house I live in now, which is at a fixed interest rate of 2.875 for 30 years.

Now excluding the home I'm living in now, since mortgage interest is a write-off against my rental income in my tax bracket of 37 percent plus 10 to the state of California where the property is located, after tax that brings down my effective interest rate to 1.6 percent out of pocket. And since that loan is fixed for the next 30 years, you also have to take another talking point into consideration that's been a very hot topic for this year, and that would be inflation.

Now before COVID, inflation has usually been about two percent a year, but today after supply chain shortages, stimulus, and money printing, the inflation rate is skyrocketed to a staggering seven and a half percent, which means that every one million dollars worth of debt is reduced by seventy-five thousand dollars a year, effectively making it cheaper to pay off the longer you don't pay it off. In a weird way, inflation is really, really good for loans, because if I'm paying a 1.6 interest rate after tax out of pocket and inflation is seven and a half percent, I'm making an extra 5.9 percent profit just for taking out a loan.

Yeah, seriously, at four million dollars, it was like I was paid 236 thousand dollars because inflation makes it that much cheaper to pay off. The same also applies to any time that I would do a cash or finance. Even though I now owe more money, I also get more money to invest for a higher return, essentially wiping out the interest I pay and leaving me with more profit. Not only that, but since I could borrow against those assets, the money I receive isn't taxable because technically it's a loan that I have to pay back. This is pretty much real estate investing in a nutshell, and it's how some people are able to build great wealth as long as they play it smart, don't borrow too much, and make relatively safe investments.

That's why I have three main criteria when it comes to debt, and if my investments don't fall within these categories, I'm out. One: I only take debt if it's attached to a safe, predictable, income-generating asset like real estate. That way, I'm not borrowing money just for the sake of borrowing money, but instead I could profit the difference between what I pay and what that investment makes.

Two: it only makes sense to borrow money if the interest rate I pay is lower than what I could make investing it somewhere else. In my Tesla's case, for example, it was a better idea not to pay off the car, get a 3.75 interest rate, and invest that difference back into buying Tesla stock, which I guess grew to an amount that's worth several Teslas outright in cash.

Three: inflation makes the loan easier to pay off over time, and that's why it's a lot easier to pay off a ten thousand dollar loan today than it would be to pay off a ten thousand dollar loan back in 1922. In this environment, I think having a loan could be a safe hedge against a well-balanced portfolio as long as you get a fixed interest rate and don't take on a loan that you know you cannot afford.

For me, this four million dollar loan is kind of like my safety net, because even though inflation causes commodity prices to go up, at the same time, it also makes my loan easier to pay down. So hopefully they balance each other out. Now, of course, I will also acknowledge that over time, I've begun to see the psychological aspect of paying down a mortgage, owing something outright, and knowing that no matter what happens, you own it; it's yours.

But logically, when you look at the numbers, unless you're a few years away from retiring, it doesn't make a lot of sense. And my rational brain keeps telling me to take the loan, don't pay it off early, and just don't be stupid. The point I want to make is that debt isn't always bad. If you have the awareness, the self-control, and the persistence to make smart calculated investments, then using debt could be a strategic way to grow your wealth.

But if you abuse it, you waste it, and you get caught up in the cycle of consumer debts, you will absolutely get burned. Play it safe, take it slow, and pretty soon you'll be on your way to making a lot of money. And subscribing and smashing the like button if you haven't done that already.

So with that said, you guys, thank you so much for watching. Also, make sure to add me on Instagram or on my second channel, The Graham Stephan Show. I post there every single day I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. And until next time...