DEBT

Debt is a powerful financial tool. This tool has the power to build AND destroy your financial situation. How much debt is used, how it’s used, when it’s used, and where it’s used decides the impact it will have on your finances. Debt can also carry an emotional weight that must be considered in your calculation. Even if you’re willing to take the risk, you may not be interested in owing someone money. That alone may be enough for you to want to avoid debt. I’ve known people who’ve experienced success with debt, who’ve experienced failure with debt, and people who’ve experienced success with little or no debt at all. Consider these three people and their decision-making regarding debt:

Examples:

1.     Grant used debt to enable his money to be multiplied. For example, he gave $200,000 to the bank as a down payment and the bank gave him a loan of $800,000. Now he can purchase a $1,000,000 property. That property has four separate living spaces that, when rented out, provide him with $6,000 after rental expenses. The loan Grant got from the bank is costing him $4,000 a month which nets him $2,000 of cash a month. With that original $200,000 investment, Grant now has extra income coming in each month and an asset that’s increasing in value. Fast forward 30 years, and Grant is someone who wielded debt to build real estate assets that outweighed the liability created by the debt. The risk paid off and he created financial freedom for his family, was able to create real estate jobs, and served people’s housing needs.

2.     Justin used debt in the same way Grant did, except he bought right before a recession hit. As people lost jobs, Justin’s renters weren’t able to pay and he wasn’t able to get new renters because laws in his state prevented him from evicting. As a result, Justin couldn’t fund his loan payments and he was forced to sell the house to pay for his debt. The house sold for less than he bought it for and Justin lost all the money he invested.

3.     Dave didn’t want to go into debt. Instead, he invested all the money he earned in the stock market and rented for 15 years. His investments grew until he had enough to purchase a $500,000 home with no debt. Now he has an asset that’s increasing in value, has no loan payment, and can save thousands of dollars a month for future investments.

Each of these examples is real and can happen to you. As you consider debt, weigh the positives and negatives carefully. Make financial decisions that are right for you and your family.