It’s very easy for Americans to develop an aversion to debt. They think that debt is something that they just need to avoid. Whether we’re talking about your mortgage or your credit card debt, it’s very easy to develop a negative attitude towards debt. After all, what’s there to like about something that you have to pay at the end of every month?
You work hard for your money. You pay taxes on your money. And there are all sorts of deductions on your money. To make matters worse, at the end of the month, this bill comes and you have to shell out hard-earned dollars to take care of that bill. Who wants that kind of obligation?
It’s easy to understand this. It’s easy to get why a lot of people think that all debts are bad. But you have to understand that there are certain types of debt that will actually make your financial life much easier.
You have to remember that debt is just a tool. It’s just a process you have to go through to raise financing. You can raise this financing to buy trinkets and consumer junk that really don’t add up to much as far as your net worth is concerned. You can buy stuff that look good and depreciate over time, or buy stuff that you eat up and lose value. Alternatively, you could use that money you raised with debt to buy assets.
Assets are things that generate income. This is a powerful item you can buy because if you buy enough assets, you could generate enough income with you’d use to buy more assets. This can create an upward spiral where the amount of money you’re generating works over time and builds over time.
Most importantly, your money is working for you instead of you working for your money. This kind of debt, instead of burning up a hole through your pocket and dooming you to a life of repayment, can actually be the gateway to financial freedom.
Not all debts are used to buy trinkets. In fact, if you’re very disciplined, you can use debt to buy up assets. This can take the form of real estate, stocks and bonds, artwork, or shares in businesses. Regardless, all assets have one thing in common. They can increase in value and they can create income on cash flow.
If you are excited about using debt or credit card facilities to buy assets, you might want to slow down. It’s easy to get excited, go out there, and just blow everything. Seriously. If you don’t have a solid plan, it’s very easy to drop the ball.
You have to structure your asset purchases properly. You have to remember that you are going to undertake financial obligations here. This is going to be a long-term repayment program. Since you’re going to be investing your time, you need to make sure that you set up the debt properly. The best way to do this is to create self-liquidating asset purchases.
What this means is when you buy an asset, it generates enough income so it not only pays for the amount of money you’re shelling out to cover the debt used to purchase it. It also creates more money on top of that. In other words, it creates a profit.
Of course, you have to factor in taxes as well. Under US law, most types of income are subject to taxes. Make sure that all your numbers line up correctly so you can make a clean profit.
There are many situations where people think they’re buying assets, when in reality, they’re actually buying liabilities. After you factor in the taxes and interest expenses, you’re actually coming out behind. So pay attention to the numbers. Make sure that everything makes sense.