I’m sure everyone has heard the old financial saying “Save your money, don’t get into debt.” Sounds like good financial planning doesn’t it? After all, how can one get rich if they’re up to their eyeballs in debt? Well I’m here to tell you that advice is the worst piece of financial advice ever given. To get rich you must be heavily in debt. The key is to have the right kind of debt. What is the right kind of debt? Debt where the interest is tax deductible. Any debt other than that is bad and you should avoid them. The problem is most people have bad debts, and lots of it. Let me show you the power of good debt.
We’ll begin with example A. Say you have $50,000 to invest and decided to dump it all into a mutual fund because your financial planner told you that funds are â€œgreat investmentsâ€. I have a lot to say about mutual funds but that’s for another blog post. If the value of the fund goes up by 12% in a year you made $6,000. Not too bad. You’re making money, but are you getting rich?
Let’s try example B. You take the $50,000 like before but this time you top up the investment with another $300,000 drawn from your home equity line of credit for a total investment of $350,000. Assuming the same 12% return, you would make $42,000 from this investment. Interest on the line of credit is at Prime (currently 5%) so you would pay $15,000 of interest for the year, which is tax deductible. Your original investment was $50,000 and you got back $42,000 for an 84% return on investment, verves the 12% when no debt was used.
This is the power of using debt to get rich. Of course in real life you would use borrow money to buy other investments and avoid mutual funds like the pledge because they’re the biggest scam filled no good pieces ofâ€¦.. Ugh, that’s for another day.