5 powerful ways to use debt to build wealth
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People tend to get uncomfortable when they hear the word debt. However, contrary to what many people think, not all debt is bad and in fact, it can be used to bring your wealth if used correctly with a clear plan and goal.
Well-off people are often misinformed about their creditworthiness and ability to qualify for a loan. When such a debate arises, they often feel clueless and wonder how does wealth affect loans and what can be expected.
Good debt is considered one of the most effective methods to start leveraging the power of your money and creating passive income streams that assist you in growing your wealth. In reality, not many people would be able to afford to buy a house or a car without debt, let alone start using their earnings to achieve financial success.
In this article, we take a look at five powerful ways you can use debt to serve you well and help you build wealth.
Using debt to buy a home or property to rent
A home is considered an asset that you can maintain, upgrade and leave to your children when you’re no longer around. When you have a second property, like an apartment that can be rented out, it can be a great way to generate an additional income.
Owning any type of real estate is what most of us strive to accomplish in life, but few can afford to buy a property without incurring debt. A home loan from a bank is the option most people choose when buying a home and they usually have a term of anywhere between 20 to 30 years, which makes the repayments realistic. When you use debt to buy an asset that can increase in value, you’re making a wise move as you build generational wealth.
Removing inefficient debt
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Having inefficient debt means reducing your wealth because of the associated interest and fees. In some instances, it could be worth first focusing on paying down this debt, by starting with your highest interest/fee debt, and gradually paying it off.
For example, if the interest that is on your credit card balance or personal loan is greater than the interest on your home loan, depending on your specific circumstance, it could be better to pay off your credit card debt first, that is if it has higher interest and fees compared to your home loan. With this approach, you’ll be able to slowly reduce your overall interest payments.
Borrowing to invest
A powerful way to build wealth over time is to borrow money that you will invest in shares, for example, as this enables you to make more investments, which would not be possible otherwise. If the investments you made do increase in value over time, this can generate a higher overall return, after the interest and all other costs that are associated with the debt have been factored in.
In addition, capital growth and income generated from the assets can be used to repay the debt plus interest and fees. The interest that is charged on the debt could also be tax-deductible.
Have an emergency fund
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Stowing away some cash for emergency situations is a smart move. No one knows when a sudden expense could pop up and such savings can prevent you from drowning in further debt in the future and negatively affect your credit score in the process.
Without an emergency fund, expenses often wind up going on a credit card with high-interest rates. Experts recommend having three to six months’ worth of expenses in the bank, depending on how stable your income is.
Debt recycling
Debt recycling is considered to be an effective strategy to build wealth over time by converting some of the bad or so-called inefficient debt, into efficient debt, that is, generated capital growth or income, or is tax-deductible.
This can be achieved by using a lump sum that could be inherited or received from a bonus. If you lend the same amount and invest it, you’re practically replacing the inefficient debt with a tax-deductible debt that could lead to creating wealth.
Other options with varying levels of risk are available for implementing a debt recycling strategy but speak to a financial adviser to determine a strategy that will work for your specific needs.
Final words
Since every investment strategy that incorporates debt carries a certain level of risk, it’s crucial to explore what approach is right for you. Regardless of whether it’s efficient or inefficient debt, remember not to incur more debt than you can afford to pay back. If managed wisely, debt can help you build significant wealth over time.