For part 1 of the Building Enduring Assets series, click HERE.
One of the keys to building enduring assets is smart debt management. Debt can be a tool, but beyond a certain point it can turn into an anchor. Michelle and I are fortunate enough to have no debt, and with that comes freedom of time and place. Don’t get me wrong, we’re not against debt entirely, but we’ve never been inspired by the idea of going into debt to pursue an opportunity. Whenever we have thought about taking on a mortgage we perform an exercise I’d like to share with you. It’s a financial analysis that’s also known as a sensitivity analysis.
Debt Management: Conducting A Sensitivity Analysis
A sensitivity analysis provides insight into the outcomes of potential shifts in the economic system or changes in our personal finance. It assesses the risk debt poses on our current and future lifestyles. Some of the questions we ask:
- How would our payments change if interest rates were doubled or tripled?
- Could we make our payments if we lost 50% of our revenue?
- What if our cost of living increase by 50%?
I’m always amazed how few people know about sensitivity analysis – it’s a simple but powerful tool that can be employed at any time.
Debt Management: Keep Your Options Open!
Doing a sensitivity analysis made us aware of asymmetrical opportunities in life and business. Ideally, we all want to keep debt to a minimum while maximizing potential upside, and we can do this by keeping our options open. Getting locked into a mortgage minimizes this flexibility in exchange for a fixed address. If that fixed address becomes too big for your actual needs, grows too expensive to maintain when fuel costs go up, or has little to no productive capacity, then you may be establishing a fragile system that diminishes in value during uncertain times.
If you have no choice but to take on a mortgage, make sure it’s for the right piece of land, with the potential to grow in value even when current economic, energy, and food systems falter. Having the right pieces of infrastructure on that piece of property can help shelter you from downturns as true enduring assets should appreciate while others depreciate.
Next up: A Look at Antifragile Properties
Featured image courtesy of Jeremy Schultz