HOW DEBT CAN GENERATE INCOME -ROBERT KIYOSAKI
When Debt Can Make You Richer
What do the very rich know that the rest of us don’t? That the D-word—that would be debt—can actually be a tool for building wealth.
After the financial disasters of the last five years, that may seem counterintuitive, to say the least. But borrowing money intelligently (that adverb is key) is what keeps national economies growing. It’s also how the wealthy build affluence.
When an investment, purchase or action can offer long-term gain, being short of money is no reason to say no. As Mari Adam, CFP in Boca Raton, puts it: “Debt done right is using someone else’s money to make more for yourself.”
But taking on debt can also be risky (you knew that). Here, some guidelines for when it makes sense to borrow to build wealth:
Build equity in real estate.Taking out a mortgage on a home that’s likely to appreciate in value isn’t the only example of “good” real estate borrowing. So is borrowing to buy income property or even to renovate, if doing so will raise the selling price. “Think of it as taking on short-term debt to maximize your investment,” points out Adam.
Real estate also offers a cheap source of money, since can be had for very (very) competitive rates–some below 3%. Not to mention that they’re tax deductible up to 0,000.
But be mindful of the recent crash: Never borrow to your equity limit, cautions Ginita Wall, CPA, CFP, and founder of “If your home loses value, the bank could call in the loan.”
Take advantage of market trends.Adam recalls clients who wanted to buy property during the 2009 recession, when prices were at historic lows. Unfortunately, their assets were in stock–and stocks weren’t doing too well at the time.
In this case, taking on debt–specifically, a margin loan against their brokerage account–enabled them to buy without having to sell their equities. “Three years later,” Adam says, “both the property and the portfolio have gone up in value.”
Start or grow a business.It can take years to save the kind of capital necessary to establish a business or expand the one you’ve got. Sometimes, “It doesn’t make sense to wait if you can take advantage of current opportunities to build,” says Wall. : You’ll need a detailed, rigorously examined and realistic business plan that shows that your enterprise makes sense and has a good chance to succeed.
Invest in yourself.Borrowing funds to give yourself a boost up the professional ladder; get a different, better job; or hold onto what you’ve got in a hyper-competitive market “is one of the best investments you can make,” says Wall. Just be sure to verify the credentials of the institution offering training, weigh the cost of the education against the potential salary increase or job security it promises, and be sure you’re really going to capitalize on those new skills, meaning that you’re going to stay in the workforce–or in the same field–long enough to recoup your investment, and then some.
Take advantage of a financial opportunity.Borrowing can be a smart move if you’re short on cash but have the chance to buy stock that will grow in value via options or through an employee stock purchase plan, says Adam. And while it may seem crazy to suggest borrowing when you have the cash to buy a car or other big-ticket item, if you can take advantage of low loan rates, “you’re buying flexibility,” says Adam. “You’ll keep that money available, so you’re ready when there’s a better investment down the line.”
In other words, when it comes to taking in debt, it’s all about being smart, safe but also strategic. Which, come to think of it, is a good strategy for all things money.
Video: Go into debt to get wealthy? Here's how: - Robert Kiyosaki
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