Ever had an amazing idea but had no possible way of funding it?
One of the biggest barriers to building wealth that many people find themselves in is the inability to acquire the necessary capital needed in order to improve their monetary status. With the current state of low interest rates, now is one of the best times to discuss an ESSENTIAL strategy that is used by some of the most successful entrepreneurs of our time, the use of debt.
Now I get it, when most people hear the word debt, alarms start going off and many want to run away. However, I am about to explain to you why GOOD debt is one of the most important tools that you can use to further your generated income.
After reading this post, you will be fully equipped with the necessary knowledge needed in order to successfully acquire the money that you deserve in order to fund your “million dollar idea”. Not to mention, hopefully be able to shift the word “debt” to a positive connotation and into a tool that you can control rather than let control you.
The Difference Between Good and Bad Debt
There is a very crucial distinction that needs to be observed before moving any further which involves the difference between good debt and bad debt. Most people are familiar with the latter concept of bad debt.
When discussing debt, we usually think about financial stress, all accompanied by bad monetary decisions which have led the individual to a binding contract that seems like a necessity in order to survive. While this is true for things like a car payment or a house, it isn’t always the case.
You see, debt is actually one of the best things that could have happened to anyone with any inclination of an entrepreneurial spirit. With the use of credit, any individual is able to allocate that money towards money generating assets.
This is the concept that sets good debt apart from bad debt. Most of the time, we associate debt as “bad” because the majority of consumers use it to buy liabilities or things that do not put money back into your pocket.
Examples of liabilities include a…
1. Car Payment
2. Boat Payment
3. Furniture Payment
4. T.V. Payment
Anything that you buy that is incapable of putting money back into your personal equity has automatically become a liability on your finances.
Instead, we want to focus that money on things that actually pay YOU to own them.
Ray Dalio, billionaire hedge fund owner of Bridgewater Associates, even advocates for this. In his video describing how the economic machine works in America, he reveals that the majority of wealth in the nation is actually credit. Only a small fraction of what we own is liquid, tangible money.
I highly recommend checking out his video as it dives deep into how our nation is driven by the use of credit and good debt. If you’d like to learn more click the link here.
Not only is Ray Dalio a huge proponent of using debt but so is Robert Kiyosaki, author of the famous personal finance book Rich Dad Poor Dad. He reveals that his ultimate secret to building wealth was using other peoples money or OPM. He explains how OPM is a great way to fund your endeavors because institutions like banks have the money and are just looking for a reason to give it to you.
Realizing that these two influential men are proponents to the use of good debt, it becomes obvious why we should take learning about using credit as a tool more seriously. So how exactly can you begin to incorporate this concept into your own life?
4 Ways to Use Debt to Build Wealth
To better help enable the use of good debt into your personal life, I have put together some examples which will hopefully help you begin to recognize your available opportunities.
Of course, if you can avoid using other people’s money to move forward in your dreams and desires then that is probably the route you should go. However, if you are unable to do so, the next best thing you can do is utilize debt to enable your goals to become a reality.
Let’s begin with the first example.
1. Invest borrowed money into assets which grow in value over time
Think about some things in your own life that could start putting money back into your pocket. I am a big proponent of finding endeavors that provide passive income or even grow in value over time.
Just as an example of what I mean by this, think of the sports card market currently. The value of high quality cards have skyrocketed and has proved to be a very lucrative endeavor. If you were to have someone else’s money to invest into this type of an asset, the value of your money would elevate over time.
Trading cards aren’t the only example of an asset which increases in price over time. Due to recent effects with COVID, many assets have revealed themselves because of their necessity today.
Some examples of assets which have risen in value include…
- Trading Cards
- Used Cars
- Gaming Consoles
The potential for finding tangible goods which will inevitably put money back into your pocket in the long run has dramatically increased.
2. Borrow money from the bank to fund profitable business endeavors
I will say, this is probably one of the most advanced uses of good debt. If you understand how to manage your money efficiently and have a great business idea, using the bank to help fund your endeavor is a great tool for you.
Of course, with high returns also means high risk so if you move forward know that running a business is difficult and can be time consuming. You should have a well thought out plan before moving forward and feel confident enough to use other people’s money. I would also HIGHLY consider hiring experts who specialize in the allocation of money to make sure you dedicate your borrowed money wisely.
All concerns set aside, many of the greatest ideas that we have to start a business are barred by one major obstacle. FUNDING. Newly created businesses are in a constant battle to gain enough funds to be able to move forward in their goals and objectives.
Why use your own money when you can use someone else’s? It is entirely possible for you to jump start your dream and achieve your goals TODAY, all you need to do is learn how to manage that wealth effectively.
3. Find a business partner or friend to fund lucrative side projects
A lot of the time, many of us are just looking for a new way to begin adding more money to our monthly income. There are unlimited amounts of opportunity out there to make an extra couple thousand dollars, all you need is to be able to fund it.
While in our past examples, we’ve covered borrowing money from banks, this example focusses more on a personal relationship. Everyone’s looking for a new way to make money. They’re looking for something new and exciting which may provide a new change in their life.
If you were to have a great idea and approach a friend about it, chances are, if they’re the right friend, you might be able to include them as a business partner. For instance…
If you were to set out to start mining cryptocurrency, but you know it costs $4500 to build the specific mining rig that you want to build, you would ask them to include their funds to provide for half of the cost that it takes to build the machine.
Yes, you might be losing profits as you will have to give half of what you make to your friend, but you are still creating new assets in your life which are working to put money back into your pocket.
Including your friends can be a great way to begin adding smaller amounts of income to your monthly revenue, especially if you’re just getting started on your entrepreneurial journey.
4. Build equity in a home through a mortgage and get paid to do it.
One of the most beneficial and safe investments anyone can make is in real estate. Real estate has allowed some of the most wealthy individuals to secure their wealth for generations to come. So how can the average person also take a piece of this pie?
Borrowing money as a home mortgage allows you to be able to own a tangible piece of real estate. Yes you will have to pay a house payment every month, but if you are able to find ways of renting out that house or maybe even a room within it, you may be able to put money back into your pocket.
If your home mortgage payment is $2500 per month but you manage to rent out the house for $3000, you have just added another $500 to your monthly income, effectively getting paid to own this piece of real estate and build equity all the while.
Not only is there potential to generate passive income from acquiring a home, but you are also building your own personal equity all the while. Over time, the home may raise in value, allowing your home to be worth more than what you bought it for, should you have purchased it in the correct market.
As many successful real estate investors have said in the past, “real estate is king”. And rightfully so, the potential returns by borrowing money to invest in a home is plentiful. With the correct knowledge and criteria for using other people’s money, you will have enabled a new level of investing all together.
There are numerous ways to use other people’s money to further your monetary status. If you find that you don’t have the necessary capital to be able to fund your endeavors, then being resourceful in finding other ways of attaining capital proves to be a very useful skill.
4 Ways to Use Debt to Build Wealth include…
- Invest borrowed money into assets which grow in value over time
- Borrow money from the bank to fund profitable business ideas
- Find a business partner or friend to fund lucrative side projects
- Build equity in a home through a mortgage and get paid to do it
If you have any questions about these concepts or want to provide even more examples of how you’ve used good debt to improve your finances, don’t hesitate to reach out! I am always looking for new opportunities to communicate with you, the reader.
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Andrew Martinez, owner and writer of Minerva Money