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Debt is a scary topic for a lot of people. They worry about how much debt they have and how it will keep them from reaching their financial goals. But what if I told you that there is a way to use your debt to help you build wealth? It’s true!
The type of debt that can do us harm is called bad debts – or credit card bills, lines of credit, and other unsecured debts. These types don’t carry with them the possibility of the reward we seek when investing our money into something more stable like stocks; instead, they’re often used simply because we’ve run short on cash during tough economic times, or want to buy something we know we can’t afford. Some bad debts are better than others. For example, a high-interest credit card debt is much worse than a low-interest student loan debt. The reason is simple: the higher the interest rate, the more money you’ll have to pay back in the long run. So, if you’re carrying a lot of high-interest debt, it’s important to focus on paying that off as quickly as possible.
Defining good and bad debt.
Before we dive into how debt can help you build wealth, it’s important to understand the difference between good debt and bad debt. Good debt is debt that is used to purchase something that will appreciate in value over time and bring you cash flow or passive income. This could include a home or a piece of investment property.
Bad debt is debt that is used to purchase something that will not appreciate in value over time. Moreover, bad debts usually require maintenance and other extra costs. This could include a car or a boat. It’s important to note that even though a home or an investment property may appreciate in value, there is still such thing as too much debt. You don’t want to be so leveraged that you are one missed mortgage payment away from foreclosure. Some people may also argue that any debt is bad debt, however, it’s not true and here we are explaining why.
There are two types of good debt: secured and unsecured. Secured debt is when you use an asset, such as your home, as collateral for the loan. This means that if you can’t make your payments, the lender can seize your property. Unsecured debt doesn’t have this risk because there’s no asset backing up the loan – but that also means the interest rates are usually higher.
In this post, we will describe how debts could potentially help build your wealth. Now that we’ve defined what good debt is, let’s talk about some examples.
1. Use debt to buy assets.
Good debt is an investment. Using debt to build wealth is by using it to purchase assets. This could include buying a rental property or investing in a mutual fund. By investing in assets, you’re putting your money into something that has the potential to appreciate in value over time. This can help you build your wealth and reach your financial goals faster.
One of the best investing assets is real estate. Real estate investing is the best asset because:
Passive Income. It’s important to find a way to divorce your time from your income, at least part of your income. That way, you make money even when you’re sleeping! And real estate provides that opportunity through what’s called passive income.
Diversification. Being diversified is a key part of any investment strategy. You don’t want to put all your eggs in one basket. By investing in real estate, you can add another asset class to your portfolio which can help you weather any storm.
Tax Benefits. Uncle Sam is more than happy to give you a break on your taxes if you invest in real estate. There are a number of significant tax deductions and benefits available to real estate investors! For example, the mortgage interest deduction. This one is huge. You can deduct the interest you pay on your mortgage, which can add up to a significant amount over the life of your loan. Another real estate tax deduction is depreciation deduction. This allows you to deduct a portion of the cost of your property each year as it “wears out” and becomes less valuable. This can be a big benefit, especially in the early years of ownership when your property is likely to lose the most value.
It’s a Physical Asset. Some types of real estate investments offer a hedge against inflation because it’s a physical asset that can be monetized via rent increases. And if you purchase the property outright, you don’t have to worry about your investment being worth less in the future due to inflation.
When you purchase a home or an investment property with a mortgage, you are using leverage to buy something that will appreciate in value over time. This means that your returns on investment can be much higher than if you had purchased the property outright with cash. For example, let’s say you purchase a $100,000 house with 20% down ($20,000). The house appreciates at 5% per year. After 10 years, the house is worth $161,051. If you sold the house and paid off the mortgage, you would have a 56% return on investment. Not too shabby! But what if you didn’t have the 20% down payment? You could still purchase the property, but you would have to pay private mortgage insurance (PMI). PMI is insurance that protects the lender in case you default on your loan. It is typically required if you put less than 20% down on a home. The cost of PMI varies, but it can add several hundred dollars to your monthly payment. In our example above, let’s say that PMI costs $100 per month. You would still make money on your investment, but your return would be lower. The bottom line is that debt can be a tool to help you build wealth, but you need to be careful not to over-leverage yourself.
2. Finance a business.
Another good debt example is using debt to finance a business. If you have a good business idea, but do not have enough money to start the business, you may be able to get a small business loan. This can be a great way to get your business off the ground without putting all of your personal savings at risk. Of course, you will still need to repay the loan, plus interest. But if your business is successful, the returns can be much higher than the cost of the loan. You do not need to lend a crazy amount of money, hopefully, we live in a time of technology and there are many businesses, which can be highly rewarding and do not need the fortune to start them. For example:
1. e-commerce store
2. dropshipping
3. social media marketing
4. web design
5. web development
6. SEO consultant
7. graphic design
8. copywriting
9. virtual assistant
10. bookkeeping
11. pet sitting
12. dog walking
13. house cleaning
14. laundry and ironing
15. garden maintenance
16. home tutoring
17. mobile car wash
18. furniture assembly
19. junk removal
20. personal shopping
You can start the businesses listed above, while still working your day job and then grow them into something bigger. If a small amount of debt will be needed – it can be a good thing if used correctly!
If you are not ready to start a business or buy an investment property- that’s totally fine!
3. Invest in yourself.
“The most important investment you can make is in yourself.” ― Warren Buffett
One of the best ways to use debt is to invest in yourself.
How can you do this?
-Get an education: Continuing your education can make you more marketable. This could mean taking out a student loan to get a degree that will help you earn more money or using a personal loan to start your own business. By investing in yourself, you’re increasing your earning potential and setting yourself up for long-term success.
-Find a hobby: Doing something you love can not only make you happier but also wealthier. How? Well, if you’re good at what you do, you could monetize your hobby and make some extra cash. For example, you could start a blog about your favorite hobby and make money through advertising, or you could start a YouTube channel and make money through sponsorships or advertisements.
-Develop your talent: We all have talents and skills that we can use to make money. If you’re good at painting, you could sell your art online or in galleries. And if you’re good at crafting, you could sell your handmade goods at local markets or online. By developing your talent, you’re not only increasing your earning potential but also doing something you enjoy.
-Take care of your health: This one is important! By taking care of your health, you’re ensuring that you’ll be able to work and earn money for many years to come. So, invest in your health by eating healthy, exercising regularly, and seeing your doctor for regular check-ups.
-Find a mentor. If you’re not sure where to start, consider hiring a mentor. A mentor can help you develop your skills, reach your goals, and achieve your full potential. And while it may cost you money to hire a mentor, the investment will be well worth it in the long run.
-Build relationships. Another important way to invest in yourself is by building relationships. Strong relationships with family, friends, and colleagues can help you in all areas of your life, including your career. So, make an effort to nurture your relationships and build a strong support network.
-Find a mentor. If you’re not sure where to start, consider hiring a mentor. A mentor can help you develop your skills, reach your goals, and achieve your full potential. And while it may cost you money to hire a mentor, the investment will be well worth it in the long run.
4. Leveraging in stocks investments
Margin debt is good debt if you know what you’re doing. Investing in stocks and bonds is the fastest way to build wealth today. I’m not talking about day-trading stocks; I’m talking about investing for the long term.
If you invest in stocks, you can use debt to leverage your investment. This means that you can borrow money from a broker to buy more shares of stock than you could otherwise afford. The key here is to only invest in stocks that are likely to increase in value over time. If the stock market crashes, you could end up owing a lot of money to your broker. But if you pick the right stocks, leveraging can help you make a lot of money.
For example, let’s say you have $10,000 to invest and you expect the stock market to return 10% per year. If you invest all of your money in the stock market, you will earn $1,000 per year. But if you leverage your investment by borrowing $5,000 to invest, you can earn $2,500 per year. Of course, you will have to pay interest on the debt, so your actual return will be lower. But if the stock market performs well, leveraging can help you make a lot of money.
Debts can be a tool to help you build wealth, however, only good debts lead you to a successful wealthy future. On the other hand, bad debts can easily ruin your life and financially enslave you for the rest of your life. Bad debt is expensive and doesn’t appreciate. As we mentioned before, bad debt is debt that is used to purchase something that will not appreciate in value over time. In addition, bad debt usually requires maintenance and other extra costs. For example, let’s say you purchase a new car for $20,000 with a loan. Not only will you have to pay back the $20,000 plus interest, but you’ll also have to pay for things like gasoline, insurance, repairs, and registration fees. Over time, these costs can add up and leave you worse off than if you had just saved up and purchased the car with cash. Cars typically go down in value as time goes by. So, for bad debt, you should work on paying off the debt as quickly as possible.
Debt can be a good thing if used correctly. It can help you buy a home, start a business or invest in yourself. But you need to be careful not to over-leverage yourself. If you use debt wisely, it can help you build wealth. But if you use debt recklessly, it can ruin your financial life. So be sure to use debt wisely and always keep your long-term goals in mind.
Debts can help you build wealth, but it’s important to be strategic about it. Make sure you are investing in something that will appreciate in value over time and that you are not over-leveraging yourself. When used correctly, debt can be a powerful tool to help you reach your financial goals.