Make Your Money Work For You

Debt: Good v Bad

Debt: Good v Bad

Jan 6, 2017

Our lives have been bombarded with financial experts preaching, “… debt is bad, debt is bad, debt is bad.” Saying that debt is bad is like saying fire is bad and you should never use it.  Just like anything in life if you misuse the greatest of things it will be bad for you.

How our educational system has failed generations of Americans and people around the world. How did we get rich people without the use of debt? To make money you need money.  The only thing shouted louder than “debt is bad” is the cry encouraging the use of Other People’s Money (OPM).

Have you heard of OPM?  If not then you are one of the people who should stay away from using debt. Economies grow and survive because money circulates and money mainly circulates via loans, aka, debt or OPM.

Many people have made and are making an incredible living on the radio and television telling people not to use debt. Go look into their lives, they are using debt. What people need is someone to teach them how to properly use debt and not to avoid it.  Just like we were taught how to use fire to light fireplaces, barbecues, stoves and ovens so must we learn how to properly use debt so as not to cause any harm or damage.

Most people cannot walk up and put down $200,000 in cash and buy a house. The only people who should be told not to use debt and to stay away from it, under any and all circumstances, are those people who have an inability: to control money, to manage money, to control/create a budget, or simply to learn and apply basic fundamental moneymaking rules. By the way, all of the necessities of using debt can be learned.

First and foremost, the proper use of debt is more than money management it is the proper use of debt for moneymaking purposes.

Consider the following:

Using debt to build wealth is like a pole vaulter using a pole to jump over the high bar.

Imagine that pole vaulter trying to jump over the bar without the pole – that is called a high jump, and the jump will fail every time. Have you ever noticed the difference in the heights of the bars between a high jump and a pole vault?  Not a small difference, but rather a major distance. Now teach that high jumper to properly use the pole and he/she will gladly, and much more easily, jump over the higher bar.

Now trying to obtain wealth by only using the cash you have on hand is like trying to high jump over the pole vault bar.  It is a very difficult jump to make for anyone. For many, only relying on the cash on hand is insufficient to jump over a hurdle.  Now give that person the proper education and the opportunity to use the proper debt instrument to build his/her wealth and stand back and watch with amazement.  Without the utilization of debt, the pole, even fewer people in our society would ever become rich or wealthy.

Let’s take a look at a couple of examples of debt:

Good debt: you own a house worth $200,000, you have $150,000 in equity, and you go to the bank and take out a home equity loan for $120,000. You take the $120,000 of equity and you reinvest some of it in income generating real estate, some of it in dividend bearing stock, and you invest and manage the rest of the money in other income generating activity.

The interest rate on your $120,000 loan is 5%. That roughly breaks down to $6,000 per year or $500 per month. However, you are not concerned with the 5% because you are an educated money making machine who can generate at least 15%-50% return on the $120,000 loan.

If you are not that confident then you have some studying to do.  People are making those returns every year. They made them last year, they will make them this year, and they will make them next year as well.

Over the course of the year you managed to generate $60,000 in profit.  You pay the bank the $6,000 in interest and you were successful in generating $54,000 in profit by using your own money.

You may be a bit confused here and you are wondering how can I say it is your own money when you borrowed it from the bank? You borrowed money that is your money, but you had to ask permission from the bank to borrow your own money. What you must understand is that equity in a house is incredibly useless to you, but greatly useful to a bank. Your house will continue to appreciate in value whether you carry a 100% loan-to-value or you have a house which is free and clear of all debt. What you must understand is that while you are proud of your free and clear home and your 100% equity in your house, that $200,000 in equity is working 24 hours a day, seven days a week, 365 days a year for someone else – the bank.

So technically you used debt – you placed a debt on your house to take out the cash value and in turn to generate a profit – in cash. Notice that you continue to gain from the appreciation of your real estate holding – your house – even though you took out a loan against it. Most people simply allow the bank to hold on to that money and generate the profits for the bank instead.

Bad debt: the same scenario as above, you go to the bank and you take out $120,000. You know that you will make 5% payment on that loan for the next year. You decide to buy two new cars, go on vacation, by the 60 inch screen television you’ve always wanted, upgrade your entire wardrobe, and live lavishly. At the end of the 12 months the bank asks for their payment and you can barely generate $6,000 in interest to pay the bank let alone the original $120,000 you borrowed. THAT MY FRIEND IS BAD DEBT!!!

Financially speaking, when you use debt for anything other than generating more money that is considered bad debt.  It is similar to bad use of fire as when you light a match and throw it on a heap of papers in your waste paper basket. You see how incredibly simple it is to explain bad debt?

Do not let fear stand in your way. Pursue your prosperity and your future freedom by learning how to properly use debt to exponentially generate wealth.

The best way to make money in any environment is to follow the CARDINAL RULE and make your money work for you.

God Bless and remember…
                   Prosperity is the name of the game…
                                      Get started…Create Your Own Economy
                                                                        MAKE IT AND KEEP IT!!!!

by: Louis Monsour

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