Debt Into Wealth

Understanding how debt works can help you turn debt into wealth. Many authors talk about debt as if it is the worst evil imaginable for those who want to grow wealth. That is because most people don’t understand how to properly use it and because of this, it can be dangerous.

Debt is any money that you borrow. Credit cards , car loans, mortgages, Home Equity Lines of Credit (HELOC's), margin loans student loans and money you borrow from friends are some types of debt.

How Most People Get Into Trouble

Pretty soon the amount they have charged far exceeds the amount they make each month. The interest payment starts to increase the amount they owe until they are so far in debt they can barely cover the minimum payment. Obviously, this is a poor use of debt.

So to go over some of the things you probably shouldn’t use debt for, they would include any luxury items. That means clothes, vacations, personal items, and entertainment.

I know it is very easy for to justify putting these types of things on their credit card by simply saying “I’ve worked so hard so I deserve it.” This is a classic excuse and this way of thinking will destroy your chances of growing wealth.

If the item you are purchasing is so valuable to you that you are willing to destroy wealth, by all means purchase it. Just don’t kid yourself into thinking this is some reward for a job well done. Weigh your options and make your decision.

Good Uses of Debt

Debt can actually be very valuable. Debt is how most people purchase a home. The government encourages this by giving people a tax deduction for any interest paid on the purchase of a home. This is a huge advantage and a terrific way to turn debt into wealth.

Also, for some it may make sense to borrow money and invest it in other ways.

For example you may want to buy rental property or you may want to buy some other investment that you can turn around for a profit.

This is called leverage and can be a valuable tool. If used properly leverage can help you turn debt into wealth. However, be careful. Increasing debt can increase your risk. And proper risk management is key to growing wealth.

An Example of How You Can Use Debt

For example, let’s say a friend offers to loan you money at a rate of 3% because you are a good credit risk. Then another friend comes to you and asks to borrow money at a rate of 6% because he is a little higher credit risk than you are. You could borrow from the first person and lend to the second person and pocket the profit.

Of course this profit isn’t free. You are, in effect charging 3% to assume the increased risk. You see if the second friend doesn’t pay you back, you are still on the hook for the loan from your first friend.

But if you have done your homework and if the second friend pays you back as promised, this was a terrific way to turn your debt into wealth.

This is exactly how banks make their profits. They borrow from one person and lend to another at a higher rate and they get a profit from the difference in interest rates. (Understand, I am not suggesting you begin soliciting your friends to borrow money. This is simply an illustration.)

Other Good Uses of Debt

Debt can also be used to increase your own marketability. For example, if you are a high school graduate and can’t afford college but would like to go, you can borrow the money to go to school. This education may increase your earning ability far beyond the amount of the loan and may be worth the investment.

Debt can also be used to start a business. Working for yourself is one of the best ways to become wealthy and if you don’t have the money to start a business but you know you will make a profit, there are plenty of banks willing to give you a small business loan to get you started.

It may be necessary to borrow money to buy a car in order to get a particular job. This would certainly be a good use of debt if the job you get pays significantly more than one near your home.

However, most people decide they need a car and then get something extremely expensive with the idea that it will be more reliable. If you are getting a job that pays $50,000 per year and you think you need a car that costs $50,000 you are wasting money. This is not a good use of debt and will not turn your debt into wealth.

Don’t fall for the trick that car dealers love to play. They will ask you how much you make and then they will tell you how much you can afford to pay each month. They may determine that you can pay $500 per month.

Then they show you a $50,000 car that they can put you in for $500 per month. This is a trick because they will just extend the payments out for 6 years or more so that the amount you pay each month is tiny. A car is for transportation and anyone who buys one because they think it will help them ‘look the part’ or will help them qualify for more money is kidding them self.

Turn your debt into wealth. Don’t use it to purchase products that destroy your wealth.