Is Debt Always Bad? No!
Using debt to build wealth is one of the best-kept secrets of the money elitists. Here's how to make it work for you:Credit: Wikimedia Commons
Did you know that debt isn't bad? At least not all of it? And that the majority of the world's richest and wealthiest people and companies are constantly leveraging massive debts to make tons of money?
I'm about to show you how simple it is to do the exact same thing that's made billionaires out of struggling janitors. No, it's not a scam or a pyramid scheme; it's a simple little strategy that consists of leveraging good debt to purchase income-producing assets.
Sounds crazy, right? After all, we're taught that debt is bad. We're raised to believe that credit card balances, outstanding loans and other "negative" financial statuses are horrible, and that we should avoid them at all costs. But let me give you an example, see if this changes your mind:
An Example of Using Debt To Make Money
Let's say I needed $1,000, and would be willing to pay you 10 percent interest for a personal loan from you. Let's also assume that you don't have a spare 1,000 bucks laying around, but another friend of yours is willing to loan it to you at 5 percent interest.
So you borrow the money from one buddy to loan to another. At 5 percent interest, you're paying about 50 bucks in interest per year. But at the same time, I'm paying you $100 per year. When the smoke clears, you're actually making $50 off of money that you borrowed!
Yes, technically you'll be indebted to your other friend, but at the same time, you'll be using that debt to build income.
Would you take this deal? If so then you're one of the lucky few who think outside of the financial box and realize that leveraging debt is a powerful way to create wealth.
Good Debt Versus Bad Debt
What's the difference between good debt and bad debt? I'm not a financial advisor, so I'm not going to give you boring, less-then-usefull industry definitions, I'm going to give you MY definitions. So here you go:
Good Debt: Debt that is leveraged to create more money than it costs (like in the example I gave earlier). Positive net income is the goal here.
Bad Debt: Debt that is NOT leveraged, or at least not leveraged to the point that it creates positive net income. Most household and personal debt falls in this category. For example, buying a leather jacket with a credit card is "Bad Debt."
Pretty simple, huh? Like I said, I'm not a certified financial planner by any stretch of the imagination, but this makes sense to me. Simple is good.
Ways To Use Debt To Create Wealth
Debt is actually a powerful tool when used correctly. Robert Kiyosaki, author of Rich Dad Poor Dad said it best, "Debt isn't good or bad, it's what you do with it that makes it good or bad." Therefore it's our charge, as savvy investors, to starting using debt to create wealth rather than overwhelming mountains of bills. That is, we need of leverage debt to make a net profit.
Here are just a few simple ways of using debt to create positive cash flow:
Buying Rental Real Estate. There's a reason why so many self-made millionaires made their fortune in real estate, and why so many of them are still churning cash by the truck loads, even after the catastrophic market collapse in 2008. Imagine if you could purchase a home on credit (in this case, the "debt" is the mortgage) and then rent it out each month for more money than you pay? Not a bad deal if I do say so myself.
Here's an example: Say you have the opportunity to purchase a rental home that you know will rent out for $800 per month, and your total monthly costs (mortgage, maintenance and all that stuff) adds up to $600. You'll actually earn $200 per month.
Sure it's oversimplified, but not by much. My point is that it's possible to use mortgages to build wealth.
Buying Dividend Stock. Forget the traditional "buy and sell" stock market investment strategies you've always heard about, and consider spending your money on those that pay dividends. (In case you're wondering, a "dividend" is money that the company actually pays YOU for your partial ownership).
Here's an example: What if you found a reliable, stable company that consistently pays dividend payments that total about 8 percent of the total stock price per year. And you could get a personal loan that charges you 5 percent interest per year. You'd actually make a net gain of 3 percent.
Granted there are a few ins and outs associated with this kind of thing, but not as many as you might expect (and not as many as most folks would lead you to believe).
Publishing Online Content. Did you know that creating income-producing online properties is a viable investment technique? For instance, this very website, InfoBarrel.com, uses a revenue sharing model that puts more money in its authors' pockets than their own. Or you could buy or build your very own website if you'd prefer, it's super easy.
For this example, I'm going to use an InfoBarrel example: Let's say that you can make, on average, about one dollar per month per article that you've published. That's $12 per year. So you look around and find a couple of great writers who can create informative, well-written and SEO friendly articles for $10 each. At these rates you'll make $2 the first year that each article is live, and from then on out you'll probably keep making that $12 per year, but this time it's pure profit.
You'll need to learn a little bit about creating successful articles, but there are plenty of free and reliable resources online, including here at InfoBarrel itself, that will help you out. But the point is that you can technically use debt to build wealth right here on this very website, or on others like it.
Why Use Debt In The First Place?
Do you know how Donald Trump got so darned rich? Because he's a super savvy investor. But simply knowing how and where to invest your money won't make you as wealthy as "The Don." Why? Because you'll need operating capital to make any substantial net income at all. That's the way he got started, and look where he is now!
Most folks don't have an extra $200,000 laying around to purchase a rental home. But if they're willing to leverage some debt, they can use a mortgage to create wealth, like in the example I gave earlier.
This is the debt strategy of billionaires. They're not afraid of debt, so long as they use it to create income assets that make them money. Likewise, you shouldn't be afraid of using debt to create wealth either.