In my blog post “The Millionaire Blueprint” I mentioned strictly to not get into debt, however what I didn’t mention is what kind of debt I was talking about, you see there is two kinds of debt bad debt and good debt and you need to understand how debt works.
Let me explain – Bad debt is the debt that makes you poorer such as debt used to buy liabilities like a car loan or a student loan or credit card debt- Believe it or not what you are taught about debt is completely wrong. How do the rich get richer? They use debt – leverage – basic principles if you want to get rich use borrowed money. Again you need to be careful how you use debt.
The richest are those that carry debt. They generally carry a lot of debt. But they have assets that more than make up for the debt the carry. In fact, the rich not only carry debt, they also use it to get richer. The difference between the rich and poor when it comes to debt is understanding the difference between good debt and bad debt.
Bad debt is what 95% of people carry and believe it or not it makes them poorer simply because they are using debt to finance a depreciating product. They use borrowed money to buy a liability which is going to lose its value over time and keep paying interest on it – It could be anything like a car, or a phone, or the kitchen sink. And what’s more is they are paying interest on it so not only are you paying the price of the depreciating product but your paying extra when you pay the interest. And guess what 10 years down the line the product you bought is worthless.
And guess what, the thing you bought is losing its value so if you pay a 100$ for something today plus the constant increase of inflation that same 100$ is worth lesser and the product even more lesser a year down the line.
Now how do you use debt to get rich? You use borrowed money to buy an appreciating asset usually with minimal going out of your pocket. That is good debt – Using the bank to buy something with only a fraction of the cost going out of your pocket. So essentially you are leveraging the banks money to buy something worth 5x or 10x of the money you put in.
A simple example is real estate – By taking a loan from the bank you can purchase a property worth 500,000 $ for only 100,000 $ going out of your pocket. You then rent out the property so the tenants pay the cost of you taking the debt while putting the extra money into your pocket. If you use that $100,000 as a down payment on a $500,000 property, then technically you’ve actually bought $500,000 in value with just $100,000! The difference, that $400,000, is good debt. You then hold the property till it’s value goes up and sell it for say 1mn$ making a whopping 900,000$ or in percentage 900% return on your initial 100,000$ investment. Tell me which stocks or mutual funds will return that kind of money in a 3-5 year span, very few and you would have to be a contrarian investor to do that. It’s not rocket science. It’s a simple proven, tried and tested strategy. Keep repeating the process and viola you have just hacked the system to use debt to get richer.
That is good debt – another example is using borrowed money to buy machinery for your business that would return 5x or 10x of your investment it could be a plastic bottle manufacturing machine or 3D printer. Again you use borrowed money for say equipment costing 500,000$ so your outgoing is only 100,000$ while the machine in value depreciates the output it gives you is what makes you profitable.
You have good debt that pays for itself. The cash flow of your business covers the debt and generates income. That income can be turned into more good debt to create more cash flow.
We’ve been taught to think of debt as a four-letter word, but it doesn’t have to be. Especially once you have the financial education to see how it can work for you instead of against you.
I hope that your eyes have opened after this post on how you can hack the system and use debt to get richer.
Understand that rich people use debt to leverage investments and grow cash flows. Poor people use debt to buy things that make rich people richer.
Have a great week!
Always remember to use debt to your advantage!
And always – get into good debt and not bad debt.