How to Build Wealth With Debt in 2022?
***Disclaimer – I’m not a financial advisor, just a normal guy with financial success. The information shared here is purely for educational purposes only***
What is your view on debt? Maybe your family was mired in debt so you had a very negative view of it. Maybe you grew up poor because your parents didn’t manage their finance carefully and it hurt your family. Maybe you are in a lot of debt so this word brings up a lot of negative feelings for you.
Debt, if not managed carefully can be devastating for your financial health, but did you know that debt can also be used to build wealth?
What are bad debts?
Did you know that not all debts are bad? Sure, excessive consumerism and buying things to rack up credit card debts, living above your means, being saddled with crushing student debts can all be detrimental to your financial health. So yes, those are considered bad debts because not only will it eats into your monthly disposable income (assuming you have some), it will also impede your ability to invest and grow wealth.
Some people only use cash and not use credit card because they can’t control their spending. I would agree that if that is the case, it’s best that you use cash so you only spend what you can afford. If you are able to use credit card responsibly, there’s nothing wrong with it. In fact, I get lots of rewards through my credit cards and they are a fantastic money saving tool when used correctly.
They also come with crippling APRs if you carry monthly debt. So the first order of business if you ever want to get anywhere financially is to pay off your credit card debt, and stay off that debt. There are many good credit card consolidation and consulting services that can help you come up with a plan to get rid of your credit card debt.
Student debts can be good or it can be bad. If you have a plan when you signed up for the debt on what you want to study, and you study at a reputable higher education that will reward you with a good job to pay off the debt, then it’s a great investment.
On the other hand, if you have no idea why you are in school and / or you are in one those for profit schools that promise the world but are unable to deliver you a solid degree and job prospect, then you have just made others rich while crippling your own ability to grow your wealth.
For example, if you sign up for loan to go to a for profit college that cost $20,000 a year and you go for 4 or 5 years to rack up nearly $100,000 worth of debt, then you come out and get a $25,000 a year job, that would be a terrible choice. On the other hand, if you go to high level public university that cost you $30,000 a year x 4 = $120,000 in student loans, but you get a $60,000 a year job, that is a much better investment in your future.
Or even if you rack up $400,000 or $500,000 in debt with a professional degree like studying to be a doctor or lawyer, but you come out making $150,000, you now have the ability pay off the student loan and build a future for yourself.
What are good debts?
Now let’s talk about good debts. Generally speaking, poor people are saddled with bad debts and the wealthy and businessman use good debts to build wealth. Remember the end goal is to build your wealth, so how do you do it?
Let’s look at banks. Banks take deposits from their costumers and offer them around maybe 1-2% interest for keeping their money in that bank. The banks then use that money as capital to lend to customers who wants to buy house with 5-6% interest. The bank lends the money to business who wants to expand their business with interest between 7-10%. The bank use the costumers’ money to lend money to credit card holders and then charge the people who don’t pay off their balance each month sky high interest rates.
You can do the same thing. You can borrow money to start a business, invest in a business, invest in a brokerage account, buy rental properties, buy properties to flip etc. and make profits borrowing other people’s money.
You see the difference between good debts and bad debts? Bad debts just make you poorer and poorer all the time. Good debts have the potential to generate income for you and build wealth for you over time.
For example, if you borrow $200,000 at 5% interest to buy a property and rents it out for $2,000 a year, your cost a year for principle, interest, property tax, and insurance could be roundly about $17,000 a year ($12,888 PI + $3,000 taxes + $1,000 insurance) or about $1,415 a month. So you might be potentially left with around $400 a month of cash flow even if you have to do some minor repairs on the house.
Now, if the house appreciates at 5% a year that would generate an additional $10,000 of equity for you each year. In just 5 short years your house would be worth $255,000 a year + $24,000 in cash flow ($400 a month x 60 months), so your total projected profit is $79,000 in both cash and equity. This is just an example of the possibility, you could make or less depends on a number of factors like rent, repair expenses, property taxes, insurance cost etc.
But the idea is this, if you do the calculation correctly and invest in the right things, borrowing money to generate income can be a very profitable venture. This is just one house; imagine if you are able to replicate the process for 5 or 10 houses, your wealth would grow at a faster rate.
You can do something similar with investing the stock market. Experts recommend doing dollar cost average; it just means to put away some money every month whether the market is up or down because in the long run, it will most likely work out in your favor.
In Conclusion
Not all debts are bad. It’s important to understand what the debts you have are doing for you, whether it’s making you richer or poorer.
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***Disclaimer – I’m not a…