The Power of Good Debt
The Power of Good Debt by Robert Kiyosaki – Daily Reckoning
There are financial gurus out there that teach the best way to retire rich is to pay off debt. Their lessons usually suggest that debt is bad or even evil. They preach that it is smart to pay off your debt and to stay out of debt. And to an extent they are right.
There is good debt and bad debt. It is wise to pay off bad debt—or not get into it in the first place. Simply said, bad debt takes money out of your pocket, and good debt puts money into your pocket.
A credit card is often bad debt because people use it to buy depreciating items like big screen TVs, cars, and vacations. Conversely, a loan for an investment property that you rent out can be good debt if the asset’s cash flow covers the debt payment and puts money in your pocket.
The people who preach the evils of debt do not understand that debt is essential to the American economy. Whether that is good or bad is debatable, but what is not debatable is that without debt, our entire economy would collapse. Our entire economy is based on steady inflation. And the way in which we encourage that inflation is through debt.
Unfortunately, the way the rich use debt and the way the poor and middle classes use debt are vastly different.
How The Poor Use Debt
As mentioned above, the poor and middle class use debt to generally buy liabilities like a car or a vacation. Even the things they consider to be investments, such as their own personal home, are not assets.
Why? Because the very simple definition of an asset is that it puts money into your pocket. A liability takes money out. A personal home only takes money out of your pocket.
This method of using bad debt to attain things that generally lose value over time keeps most people financially enslaved to debt for most of their lives.
And when they do finally decide to get off the drug of bad debt, they often spend years working harder and harder to pay it off. It’s a lot of lost time and opportunity.
How The Rich Use Debt
The rich use good debt to grow their worth, and they invest in cash flowing assets using Other People’s Money (OPM)—both the bank’s and investors’.
OPM was a fundamental concept of my rich dad and a sign of high financial intelligence. By using both good debt and OPM, you can dramatically increase your Return on Investment (ROI)—and you can even achieve infinite returns.
Good debt is a type of OPM. The downside to debt is that you can generally only borrow a certain percentage of an asset’s purchase price. In keeping with our real estate example from my previous post on good debt, that is generally around 70 to 80% of the purchase price.
Because of this, you have two choices when you find a worthy investment: use your own money or use other people’s money. Provided you structure the deal well, the more you can use other people’s money, the higher your return will be.
Many people think it’s a fantasy world that people would just give you money to invest, but that couldn’t be further from the truth. The reality is that most people don’t have time to find good deals. Instead, they rely on people with the proper financial education, skill set, and drive to bring deals to them.
My real estate advisor has perfected using OPM. His company, MC Companies, buys apartment buildings. He does all the hard work of finding deals, doing the due diligence, negotiating with owners and lenders, and handling management. In return, people line up hoping to invest their money with him.
Today, Ken does big deals that require a certain type of investor. Not just anyone can invest with Ken. But he started with small deals, like the ones I’m writing about today and worked his way up to big deals.
The Power of Good Debt
Here’s an example of why using good debt is a powerful investment tool for the rich.
Using the bank to leverage my investments, I can leverage my money.
Using simple math, let’s assume I have $100,000 and am looking to invest it in a $100,000 property that rents for around $800 per month. You can find many properties like this if you look diligently.