Ask a person with overwhelming debt what his or her biggest problem is and that person will invariably say, 'Debt!' Most people in that situation dream of living debt-free.
Debt Use
But is debt really the enemy?
- Many of the people in the world actually have and regularly get into debt. These are not about the ditzy socialites or overpaid celebrity types. I'm talking about self-made millionaires and billionaires. The kind of people who started off poor or average and amassed and held on to great wealth.
- We see Debt as evil. The self-made millionaires and billionaires sees as a tool. Definitely not the evil end of life as we know it. That is why the rich always think about things in a different way.
- But first, if you're in overwhelming debt right now, your debt is a disaster. You have to get rid of your debt. You won't prosper until your debt dies. Yours is call a dumb debt.
How to Use Debt to Become Rich
Not all debt is like your dumb debt. There is actually such a thing as smart debt. Rich people enter into smart debt all of the time. They do it on purpose. They have an actual plan in mind. A self-made millionaire does not just stumble into debt without realizing it.
He or she is aware of entering into debt and has a carefully calculated plan to get out of debt and a date to do so.
The debt of the rich is all about leverage.
A lever is one of the earliest forms of tools invented by humans and it was designed to magnify or amplify human strength. A guy with a lever could move something much larger and heavier than a guy relying on brute strength alone. Most people without much money are like the guys without the levers. We have only the power of what little cash we have with us.
For example, imagine you had the opportunity to get in on a business deal that you knew was almost a sure thing to make money. You could invest your own money, selling stocks or a home or gutting your retirement portfolio. Another approach is to borrow the money (debt!), invest it, and reap the reward.
You can do this already if you buy a house. Let's say you find a house that you believe is undervalued. You want to buy it, but it costs $250,000 and you don't have that kind of money in the cookie jar. So you invest $25,000 of your own and mortgage the rest. And let's say you're prepared to keep the house for a year or so while you make renovations, investing another $25,000 in upgrades. You're a savvy real estate person and a year later, you put the house on the market and walk away with $350,000. You pay off the mortgage ($225,000) and the money you sunk into the place ($25,000 plus a year's worth of mortgage payments, say $18,000) and your downpayment ($25,000) and you walk away with $57,000.
See how that works?
Self-made wealthy individuals look at debt as a way to be a 'lever'. To leverage a little money to do the work of a lot. If your own debt was about buying cars or vacations or clothes you couldn't afford, that's not smart debt. You need to pay that off and stop doing that kind of thing.
By the way, smart rich people also know that when you invest money, serious risks are involved. They study those risks, think about them, and make plans for them. And if they get caught and we all do, sooner or later they don't whine. They just go on.
