A New Way of Looking at Debt That May Surprise You

by : Jo Ann Lequang

Debt-free sounds like a dream come true for the financially strapped individuals confronting too much debt with too little paycheck. Debt may seem like a four-letter word to you, but did you know that there is actually a way to use debt to increase your wealth? There is! But it's probably not the way you use debt! Learn from the rich.

But is debt really the enemy?

It may interest you to realize that many of the wealthiest people in the world actually have and regularly get into debt.

Now I am not talking about the crazy rich like airhead socialites or overpaid movie stars. I'm talking about self-made millionaires and billionaires. The kind of people who started off poor or average and amassed (and held onto) great wealth.

A famous novelist once said, "The rich are different." I don't know about that, but I can say from some recent observations that "The rich think different." Only I'd say "differently" because it's grammatically more defensible.

Debt is not the evil end of life as we know it, if you think about it in a different way.

First of all, if you're in overwhelming debt right now, your debt is a disaster and you have to get rid of it. You won't prosper until your debt dies.

Don't think that debt comes in only one type (the type you have). 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.

So what's so smart about their debt? Their debt is 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.

But let's think differently about money. 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 caughtand we all do, sooner or laterthey don't whine. They just go on.