Good Debt, Bad Debt
May I ask a personal question? Are you
in debt? And if you are in debt, do you have good debt or
bad debt? Do you know the difference?
You might be asking, “How can debt
be good debt? Isn’t all debt bad? Wouldn’t it
be better to owe nothing to anyone? Isn’t financial
independence all about becoming debt free?”
Do you want to know one of the best kept
secrets of creating abundance? The secret is, Go into debt.
In the movie, The Matrix, Neo is offered
two pills. The blue pill will allow him to maintain the illusion
of the matrix. The red pill will show him the truth.
You take the blue pill and the
story ends.
You wake in your bed and you believe
whatever you want to believe.
You take the red pill and you
stay
in Wonderland, and I show you how
deep the rabbit-hole goes.
Morpheus, The Matrix |
When it comes to debt, each of us is
faced with a blue pill or red pill choice. The blue pill will
tell you to pay off your debts. Save your money. Invest it
in safe investments. The promise of the blue pill is that
eventually this strategy will allow you to become debt free
and financially independent.
Blue pill advice says, “It is up
to you. The only money you will have will come from your own
efforts. Scrimp, save, and slowly, slowly, you will begin
to build a nest egg.” Blue pill advice is built on the
idea that money is scarce, and the only way to get more money
is to work for it.
The red pill strategy takes a different
route. Instead of paying off your debts, you take on more
debt. This red pill strategy flies in the face of what “everyone”
knows to be true. Red pill advice says, “Use other people’s
money, otherwise known as OPM, to get what you want.”
The truth is that the blue pill strategy
is based on the illusion that you have to do it alone. If
you follow the blue pill recommendations for getting out of
debt and creating financial abundance, you will be limited
to the little bit of money that you can earn and save through
your own efforts.
Many of the deepest truths I learned
about life I learned at Bank Street Beach, on Cape Cod, Massachusetts.
As a young child, going to the beach almost every summer day,
I took many buckets of water out of the ocean and poured the
water in a hole I had dug in the sand. No matter how many
buckets of water I took out, I never expected the ocean to
run out of water.
It’s the same with money. There
are oceans of money available on this planet. You might be
deeply in debt. You might not have much money. The fact is,
other people have lots of money. And the interesting truth
is that many of the other people who have abundant money want
to put their money to work making more money.
Put the two realities together. You
would like to have more money and the people who have money
would like to put their money to work. What do you have? You
have the secret of creating wealth. The secret of creating
wealth is good debt.
The essential insight is to know that
the difference between good debt and bad debt is the difference
between spending and investing. Bad debt is spending money
on whatever does not create more money. In contrast, good
debt allows you to use OPM to create more money. Another word
for good debt is leverage. Leverage through good debt is a
powerful means to financial abundance.
If you want to buy your plasma TV, you
can get credit to buy it and you will repay the money with
interest. Borrowing to buy a plasma TV is bad debt, unless
you can figure out a way to make money with it. However, show
people with money how you will create more money with their
money, and you can get other people to invest their money
in your efforts. They will charge you interest for the privilege.
This is good debt.
About ten years ago, my husband and
I had our own red pill, blue pill experiences. We went to
see a financial planner to ask about investing. He told us
that we had to pay off all our debts and amass a certain amount
of money before we could start investing. He offered us a
blue pill.
At about the same time, I went to an
evening seminar put on by a mortgage broker, who explained
how people could buy property with no money of their own.
He offered us a red pill.
As a result of taking the red pill,
we bought a $284,500 house with absolutely no money of our
own. Since we didn’t have enough money for a down payment
for a conventional blue pill mortgage, we got 100% financing
through private money. Was the interest rate higher than blue
pill mortgages? Of course. We paid 9% interest at a time when
banks were offering mortgages for much less. The red pill
truth is that paying 9% interest allowed us to buy a house
we could not have bought with our own money.
We refinanced a year later when property
appreciation allowed us to qualify for a conventional mortgage
at a lower interest rate.
We recently had the house appraised
for a refinance. After ten years, the house is now appraised
at $680,000. That means we gained $395,500 without investing
any of our own money. As a matter of simple math, the 9% interest
we paid for a year resulted in an infinite rate of return
for us.
Perhaps one
of the greatest "secrets" of the richest people
in the world is summed up in those 3 words: Other People's
Money – OPM for short.
Matthew Lesko |
The essential point of the story is that
we dipped into the ocean of abundant money available to us,
and took on good debt. By using OPM, we have assets available
that we would never have gained by following the blue pill
advice of the financial planner.
If you are in debt, I encourage you
to take a red pill rather than a blue one. The red pill secret
is that you don’t have to do it all alone. When you
use OPM to invest, you can create more return on your investment
than you can by using your own money. By swallowing the red
pill, you will create more money to pay off your bad debts
than you will ever be able to make through your own efforts.
Creating your “abundantly alive
now!” means knowing the difference between good debt
and bad debt. Paying off bad debt is a critical part of creating
financial independence. Taking on good debt is one of the
most powerful tools you have available for creating abundance.
Abundantly,
Kalinda Rose Stevenson
|
