How to Use “Good Debt” to Leverage Net Worth
Why “Good Debt” Beats Saving Accounts
It’s often become cliche these days…stay out of debt! That’s the Dave Ramsey approach, right? To save your money, buy only in cash when you can afford it, and limit any risk to destroying your credit by focusing your efforts on putting dollars in your bank account.
Lack of Debt Problem is…
When you don’t leverage your dollars, there’s no ability to building wealth outside of a ratio that is limited by the rate of inflation and your time.
Use debt that only puts dollars in your pocket after expense from that debt.
My favorite example of this is a rental property that has been financed.
You are using good debt to leverage the property in order to create income for yourself. Naturally, this means that the rent amount obtained covers all expenses and provides a profit. By doing so, the investor is using debt (“good debt”) to add to his/her net worth through the pay down of principal with rent and provide rental profits to their monthly income stream.
“Good Debt” Ideas :
Other means to use “good debt” could include :
- Becoming a short term lender and using the arbitrage being borrowed funds and offered funds as a form of “good debt”.
- Using a service like “Turo” to create income by leasing your car temporarily to the general public.
- Opening a business from a SBA loan or line of credit with the intent of leveraging those funds to create an income stream.
At the end of the day, earning the income stream that provides a profit is critical.
However, taking into consideration the time constraints that the “good debt” obligation may take on for you is just as critical.
This is because it is not just the use of someone else’s funds you should consider leveraging. IT IS YOUR TIME THAT SHOULD BE CONSIDERED AS WELL!
Reverse Engineer Your “Good Debt” Goal Timetable
Furthermore, once you have an outline for how you will leverage “good debt” to create net worth, the next step is to layout an end goal for what you want to achieve with this cashflow. I like to look at this as monthly cashflow as a goal rather that a net worth goal. Reason being…monthly cashflow tends to be a more stable metric as net worth can fluctuate based upon market conditions.
Once you have your monthly cashflow end-goal in place (I.e.: $10,000 per month profit from “good debt”), work backwards to establish accomplishable quarterly goals. Then, monthly goals. Then, weekly goals. In essence, you are working towards establishing what needs to be accomplished on a day to day basis to understand what actions you need to take DAILY to meet your “good debt” leveraging end goal under the terms and parameters you have set for yourself.
Experience and Net Worth Leverage Your Timetable
Finally, it’s important to note, borrowing “good debt” becomes easier and easier over time as you establish experience and net worth. Especially, when you enter the commercial banking arena. Your experience becomes an asset you can use as a joint venture partner or to push the needle on other ventures. However, markets change and surviving bad markets and not getting greedy in a good market will further leverage your experience as it grows in your “good debt” venture.
Don’t Give Up!
As with anything in life, perseverance is necessary. And remember…pigs get fat and hogs get slaughtered. Don’t give up on your “good debt” venture unless unforeseen circumstances change the framework completely. Be in tune with the macro and micro markets that influence your venture and continue to set time aside to innovate your venture at least once per week.