This is my third ever Guest Post: Andee Sellman agreed to it, after I had come across his blog and linked to one of his videos on this site.
Andee soon contacted me and we realized that we both live in the same city (Melbourne, Australia … well I split my time between Melbourne and Chicago) and share similar philosophies on personal finance.
This ‘video post’ explains the ultimate goal of Andee’s unique Personal Finance game (called Where’s The Money Gone). Andee’s video can be accessed by clicking on the image below; I really think that you enjoy it …
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Many people have been fooled by the financiers over the last 15 years of boom into looking at the wrong ratios. As a result they don’t know whether they’re being fiscally responsible.
Have you heard of the ratio 80% LVR. This stands for 80% loan to value ratio. Another way of expressing ratio is this :- 400% Debt to Equity!!!
If people continually focus on looking at the lower ratio they will be lured into buying overvalued assets, funding them with too much debt and then wondering why they’re struggling with their cash flow when they’re supposed to be feeling wealthy.
In this video I explore a better ratio to focus on. This means wealth creation is built more sustainably and with less risk.
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Thanks for the video, Andee!
It really helps to explain why people go broke in buying too much property (home and investment) and/or other investments on finance, even though we’ve always been told to borrow more to invest more. In upcoming posts, we will explore the link between Andee’s ‘twin equations’ and our own Equity and Income Rules …
BTW: Andee filmed this video in the lovely (if a bit dry due to the extended drought) Stephens Reserve – a section of parkland near his office in Vermont (an outer suburb of Melbourne); Andee plans to do a ‘video tour’ of Australia, filming a number of videos at scenic locations around the country … or, perhaps the world!? If you want to keep an eye out for these videos – which are sure to be instructive and entertaining – I suggest that you check in at Andee’s blog from time to time.
Great video, I found this and watched it a couple of days ago. Very informative!
@Andee – I’ve always thought that you should buy an (usually) appreciating asset like real estate with as little of your own money as possible. I mean if you can buy a $1,000,000 home for $200,000 down and it goes up 5% a year, you just made a 100%+ return in 4 years, right? If you put $500,000 down your return drops to 40%.
I guess I’m looking at the bank taking all the risk of loaning me $ at 400% Debt to Equity while I get the benefit of the leverage that provides me as a good thing. Obviously, as a noob, I’m the one that’s missing something, what is it?
Is it the luring of buying an overvalued asset? What if it’s not definitely not overvalued, do you still advocate less leveraging?
Hey Ryan,
A friend just pointed out your comment so I thought I’d try and give you a response.
There is no doubt in my mind that real estate values have a close correlation to the availablilty of credit to purchase them. So with large amounts of cheap credit property values will rise above true values which presents a risk to purchasers.
I do believe in leverage BUT many people did not realize the risks they were taking and providers of credit will always sell you to higher risk becasue they’re selling you something..DEBT
So by looking at both sides of the equation.. Loan to Value ratio AND Debt to Equity you will have a better view of the risk in an opportunity.
I think that in the boom, many people did not believe that property values could actually drop and now we all know that this is possible. Therefore strategies that did not take this into consideration would not have be rigorous enough and were probably riskier than people thought.