When many people hear the word debt, they will often cringe. They have their own view on debt as a bad thing and they should get out of it as quick as possible. Often they are not so good at managing their finances that they will rack up a heap of credit card debt so they can deal with the problem later.
You see people with things that they can not afford and it’s because the banks are willing to lend them the money. After all the banks need to make money and the more they lend the more they make.
Every time you owe someone money, you become an employee of their money. The big question is just how you are going to repay back the loan?
If you are an employee, you are trading your time for money to make repayments, and the lending criteria has a lot to do with just how much you earn. The banks will lend you the money as long as they know that you are able to repay them or they will often have collateral in the form of tangible assets.
Robert Kiyosaki who wrote the famous book Rich Dad Poor Dad, defines assets as 'anything that you acquire that puts money into your pocket' and a liability as 'any acquisition that takes money out of your pocket'.
Therefore, if there is any money left over after all expenses then it is an asset, otherwise it is defined as a liability. The banks will lend money for both assets and liabilities. You are able to have material things and not have to have the stress of making the repayments if you first acquire the assets to pay for them.
It all comes down to how much money you are able to borrow and how you are going to use the money. If you are going to use the money as good debt than I believe that you should borrow as much as you can as long as you are in control of that money.
If you are borrowing it as bad debt then make sure that you have income producing assets that will cover the repayments. In simple terms good debt puts money in your pocket and makes you wealthy whilst bad debt takes money from your pocket and makes you poor.
Positive cash flow assets may seem unrealistic and an impossible task. You may also be thinking that the banks will not lend to you the money to purchase these assets..
Well.. how about using debt to start your own business? Then when your business is successful it can then pay for any luxuries that you want to acquire.
The only problem with this is that the start up cost is substantial and it may take up to 3 years if you want to have a highly profitable business right? This was the case over 10 years ago but with the advancement of the internet you are able to start an online business with a substantially lower startup and overhead cost.
This is the exact same risk that my brother and I took to acquire good debt to start our own online business. With the money we borrowed, it allowed us to create a business plan that includes a budget and forecast to make the repayments.
Taking the risk of borrowing good debt from the bank allowed us to escape the 9-5 rat race and it bought us time to concentrate on our business full time. It is now our financial statements that the banks will look at when we want to borrow to acquire assets instead of our salaries.
Here are four facts you should remember when wanting to acquire debt
- Good debt is debt on which someone or something else makes the repayments, and bad debt is debt you pay for
- Acquire debt to buy assets that will then pay for your liabilities
- Debt has the power to make you very wealthy, but it also has the power to make you very poor
- Have a plan of how you are going to repay debt before you borrow ita plan of how you are going to repay debt before you borrow it
I do agree that getting out of debt and cutting up your credit cards is good advice for most people, but if you understand the power of debt and know how to get into more of the right kind of debt, then you can create more wealth and a life of financial freedom.
It’s been a pleasure to share.
To your success
Connect with us on Facebook
Connect with us on Google+
Connect with us on Linkedin