Debt: The devils tool, or a way to amass wealth?

Debt is often characterized as a nasty word, and to most folks this is entirely true. How often do you hear of the family that splits apart under massive credit card debt? Or the conundrum of the “$40k” millionaire- the person who lives way above their means, throws their lifestyle on a credit card, and throws out caution to the wind? All to often. Then, how often do you hear about the savvy entrepreneur who buys several investment properties on a credit card, refinances, and enjoys the monthly cash flow? Not as often, but trust me, they are out there.

Lets start with the downside first. With an initial look, debt is like a bad actor waiting for its next bit role in a C level movie. Lurking, existing, beckoning you to come in and go for a ride. Used incorrectly, debt can destroy your credit, subject you to nasty credit phone calls, and drive you nuts. Excessive debt will in some cases limit employment opportunities. You will be red-flagged with banks, and any loans you try and take out will be at massive, excessive interest rates. That is the side of debt that is “bad.”

“Good debt” on the other hand, can be used to create tremendous wealth, and can be used as a way to tactical climb the lifestyle ladder. Using debt with real estate is the simplest and most obvious proof for this claim. Putting a small sum of money down, borrowing the rest, improving the property, refinancing, and improving your equity position is the simplest and most straightforward way to do this. Repeat, and climb the property ladder several times, and your wealth will expand like a mushroom cloud. Never mind the cash flow that the real estate will provide in the interim.

Another good use of debt is in starting a business. If you a valuable business idea, customers, and are just getting up and running, borrowing money to expand the business and take the next step might be just what you need. Be careful to watch out for restrictive covenants, prepayment penalties, and restrictions on how you can operate the business, and “how gets paid first” if you do take out debt financing.

Remember, debt as a tool to gain wealth or start a business is a powerful tool that must be used carefully, decisively, and with reason. Debt to finance an unexamined lifestyle is foolish and must be mitigated at all costs.