Wealthy Mindset Series #13
Credit Cards vs Mortgages
As you know, one of the most important keys to creating wealth is the right attitude. In Series #12 we spoke about how the wealthy focus on building their net worth versus paying down debt. And in this series today we will talk about how the wealthy understand good debt versus bad debt and how they use good debt to become millionaires.
In the previous articles of the series you saw how combining paying yourself first with a focus on building your net worth instead of paying off debt can lead to financial success. Now, using good debt multiplies the wealth you can create.
First, let’s define bad debt. This is the debt you created from purchases you consumed, like groceries, meals, travel, or a vacation, but carry the balance from month to month on a credit card and pay interest on it.
As an example of good debt, let’s say you were to purchase a house, an apartment building, or any other real estate investment for cash. We will use a property valued at $100,000. In this example I will also omit any rental income from the property, or sales commissions, or other expenses and only focus on the appreciation.
If the property grows in value by 3% you could sell it for about $103,000. Your profit is $3,000, or 3%.
If instead of paying all cash for the property, let’s say you only invest $30,000 and borrowed the rest. To keep things simple I will ignore loan payments. Here is how it is at the end of the year with the same 3% growth factor:
You also sell it for $103,000, but you only put down $30,000 to buy the property. Now your profit is $3000 from a $30,000 investment or 10%.
AND, now you have $70,000 left over to purchase two more properties!
But beware: The debt can cut you down as well. In 2008 when real estate values plummeted, people lost their properties because they were over leveraged. The loan was too high of a percentage to the value of the property, and the value became less than the amount owed.
This can also happen when stocks are purchased on margin and the value of the stock drops dramatically.
We have been conservative about the debt to value ratio when we purchased apartment buildings and it had virtually no impact on us in 2008. The rents were stable, the loans were all paid, and we were fine.
Hopefully you can now see how the wealthy use debt to multiply their riches and how I was able to go from broke at age 50 to a multi-millionaire in just a few years.
In the next article of the series we will talk about how the wealthy are willing to share how they succeeded and are not afraid to promote themselves and their value. They are not stingy with their knowledge.
To Your Prosperity,