If you want to become Rich, using Debt in your favour can be a way to increase your purchasing power, but mainly, use it if you know how to create wealth.
Why Debt is just a Tool
The first thing to understand is what is the difference between good debt and bad debt.
The easiest way to describe it, is that when debt generates wealth, and generates cashflow, then it can be considered as good debt, because taking out money from others, that may be the bank or someone else you know or any other funding platform. And using their money to generate your own money, dude you’re doing smart things.
But when you are taking out money, that you don’t have, to buy things that will give you nothing but extra bills to pay each month, that is something that can be considered as bad debt.
Business loans as Good Debt
Using money to purchase a machinery or equipment to get your business going faster, stronger, it will create more revenue and in the end, it will be beneficial for your business. Instead of trying to save up all the money to buy the equipment, in the end it will cause you to have no debts, but then again, working so hard, to pay for certain machinery in full, is not going to make a difference. It could even slow you down in the process. So sometimes, making the extra step will improve your business even more.
Student loans as Good Debt
The second good example of good debt is a student loan. Now, it does depend on what degree you have. But when you compare a college degree salary to a masters degree salary, there will be a difference, and on the long term, having that higher degree will give you more financial benefits. But like I mentioned before, it is important to take a look what degree you take, my advice is to be in the STEM majors. Science, Technology, Engineering or Mathematics, since these majors are mainly more sought for, compared to something in arts for example.
Real Estate as Good Debt
The third good example of good debt is real estate. Taking out a loan to be able to purchase a property, and have that property pay your loan off, is an easy but smart way to leverage other people’s money. When you have 100k laying around, and you buy a property straight up like that, the return on investment may not be bad, but it is not impressive as well, whereas when you use leveraged money, you can get up to 20% of return on investment on the amount you invested.
Credit cards as Bad Debt
When we take a look at bad debt, the first bad debt example is credit card loans. These are horribly high interest rates. As long as you off your credit payments in full at the end of the month, you’ll get a good credit score, but the moment you can’t pay off in full, you’ll go into debt, and interest rates are high. So having a huge debt here, will not help you in growing in wealth or cashflow.
Cars as Bad Debt
The second bad debt is a car loan, what I see very often is that people the moment they have an increase of their salary, they tend to use that extra money to buy themselves a newer car, and other luxury items. And with cars, it’s nice, but in most cases people aren’t able to pay the car in full, so they take out a car loan, but the problem with cars is that the moment you drive them out of the garage, the value just drops hugely.
Remember, Debt is just a Tool