4 Fascinating Reasons Why You Should Love Debt

Reasons to Love DebtMost everyone hears the word debt and quickly judges it to be bad, and it is…sometimes.  Too much debt can make or break any person financially, but what about too little debt?  Too little debt can stagnate any investment return, no matter what kind of investment.  

For example, let us say that you have $10, 000 personally invested and have borrowed $90,000.  Pretend the $100,000 makes 8% per year and at the end of the first year you made $8,000, with debt service being 5% of the $90k, or $4,500.  Now these numbers aren’t exact, they are just rough numbers, bear with me.  $8000 minus $4,500 equals $3,500.  

In total, you have profited $3,500 in one year with only $10k invested.  That is the equivalent of 35% return on your money and that is pretty good!  

What if all that $100k was your money though?  Then your profit is only 8% and you must invest more of your own money, only to profit less!

This article is not meant to entice you to take on new debt and go buy a new car or new smartphone.  

That debt does not make you money.  

Let me say it again, because if you take anything away from this article, it should be this.  

Do not take on debt that does not make you money.  

More Debt Means More Leverage

Take a quick mental list of your assets.  Did you list your home (if you currently own one)?  Yes? No?  Now, ask yourself, which of those ‘assets’ make you money.  Do any of these assets produce cash, that you can use on a regular basis somehow?  Your home does not make any money until you sell it (or if you rent part out).  Chances are, the only true ‘asset’ listed, is some kind of stock market or retirement account.  

If you are like the majority of the middle and lower socioeconomic class, you have a fair amount of consumer debt.  Consumer debt being regular credit card debt, car payment, etc.  There are all kinds of methods to reduce debt all over the internet, including in the blog from the screenshot above.  So, we won’t get into that.  Instead, we are going to focus on how debt can make you money.

The more debt you have, the more capital, or money to spend, you have.  Therefore, you have more buying power, also known as leverage.  If you want a more in depth look at leverage, it is explained here.  You must buy assets that make you money if you take on more debt.  This is not to say you should over-leverage yourself.  That will only lead you down the wrong path.

Debt Helps Purchase Assets You Couldn’t Afford Otherwise

Going back to the first example, let’s say you don’t have $100k, but you do have $10k. It has taken you absolutely forever to save $10k and is quite the precious sum of money to you.  How do you decide what do you do with it?  

Where you are in life, this decision could go different ways.  If you are about to have your first child, you may spend it on baby items.  If you have teenagers, this could be sporting equipment for them.  You get the idea.  If your first idea was to go into a large amount of debt, you may be a special kind of crazy.  

Just kidding!  That is what some of the best investors and brands in the country do.  They find the best way that their money can make more money.  

Debt allows you or your business to purchase much needed equipment or services, but you must purchase assets.  This cannot be stressed enough.

We can wish right...

Debt Forces You To Be Organized

We all know that kid, just out of high school or college, that buys the nicest car possible before they move out of their parents’ house.  We also all know that this kid made a dumb financial decision.  Having bills that are due on certain days of the month helps the debt owner either be on time or risk have their credit screwed up.  

No one enjoys a car payment, but you should have a car payment for every car you buy, under one condition.  If the loan’s interest rate is lower than the interest rate you could get from investing that money instead.  For example, if you buy a car that costs $20k and you put down 10% or $2k.  You are financing $18k at 5%, for easy numbers.  Let’s say you invest that $18k and it makes 10%.  That means that you are making 5% of $18k or $900 per year that that money is invested.  Since a typical car loan is 5 years, you are making $3,879.11 over that 5 years.  

Or you could just spend $20k on a car.

New car and about $4k in profit for your $20k or just a new car?  It’s a no brainer.    

Organization

Debt Reduces Risk

Ever heard the term ‘diversification’?  This is the same principle.  By using debt, you are diversifying your exposure to risk.  If this is used correctly, you can mitigate the adverse effects of an investment gone bad.  You will have an investment go bad.  

Even Warren Buffet has had bad investments.  The reason that he can stay in business and stay profitable is because he correctly calculates his risk.  

Through this correct calculation, he can endure the tough times of low profits when other businesses and investors cannot.

Conclusion

Debt is not for everyone.  Some people just cannot organize themselves in such a way to manage it effectively, but you can learn!  Maximizing profits from all investments is what every investor ever has tried to do.  They wouldn’t be an investor otherwise.  It stands to reason that if you have more money, you can make more money, due to compound interest.  

So, if you don’t have more money, borrow it.  Learning to be comfortable with debt is sometimes the most difficult part.  

Personal story time.  My grandfather told me a few years ago, that he had not financed anything since the 1970s.  I was flabbergasted.  I had no idea he had that kind of cash.  Now, he isn’t rich by any means, but he is comfortable.  

This approach is and wasn’t the most intelligent approach, if your goal is to make the most money possible.  If he had financed even half of his purchases, his net worth would have gone through the roof over the years.  He didn’t have good debt or bad debt.

Too much unsustainable debt is bad debt.  There is no doubt about that.  Make your debt make you money and you will be able to retire when you want.  

Good luck and if you have any questions, leave a comment or email me at Feedback@PlusFourZeros.com. Thanks for reading!

Learn what I did wrong or right from My Journey in investing, real estate, and rental properties OR check out other articles on my Blog.

-Trey

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