Did you know that most wealthy people are also often the most indebted people? It sounds counterintuitive but it’s true. Why would someone who is a billionaire borrow money right? Zuckerberg for instance financed his home in California with a 30-year mortgage. Why didn’t he just pay cash? With all his money, he could easily do that. Keep reading to find out the answer.
It is commonly known that debt is bad. It’s the modern day slavery. The moment you owe someone, your life isn’t yours anymore. We’ve talked at length about debt in our article “How to break free of the modern day slavery”. If you’re struggling with debt, go ahead and read it HERE.
There is more to debt than meets the eye. Most people struggle with debt because they let it enslave them instead of taking advantage of it. There is good debt and bad debt. To illustrate the difference between the two, let’s consider this scenario:
Two men, Jim and Dan both get a $25000 bonus at the end of the year. Jim goes out and buys a fancy car he always admired worth $250000. He takes a 10-year loan at an annual interest rate of 8%. He pays the $25000 as a down payment and he has to pay off the rest every month. Because of the interest, he has to pay over $2700 every month which will be over $327000 after 10 years! He’s paying way more from his pocket. Meanwhile, over these 10 years, the car being a liability depreciates in value drastically. Even if he tries to sell it after, he will get much less than he paid for. This is an example of bad debt, the kind of debt you should avoid.
Dan however, decides to buy a duplex worth $250,000. He also puts $25000 as down payment and gets a 30-year mortgage on the house at a fixed annual rate of 6%. He has to make monthly payments of over $1300. So what does he do? He puts the house on rent and gets monthly payments from the tenants that he uses to pay off the loan each month and he still has some cashflow left. After 30 years, the house now becomes his at the expense of the tenants. He got into debt, but used other people’s money to pay if off. Also, the house appreciated in value over time and it’s worth more than he paid for. He can sell the house and make a profit. This is an example of good debt, getting into debt because it makes sense.
Would you rather be Jim or Dan? The main point is that you shouldn’t get into debt to buy liabilities. Get into debt when it makes sense. Being able to leverage debt to make money is a skill that wealthy people have mastered. You should look for opportunities where you can use other people’s money to pay off your loans.
Back to why Zuckerberg chose to borrow. He did so because mortgages are secured loans with lower interest rates. More so, because of his high net worth, he got a much better rate of only 1.05%! That’s because the bank knows that he has the means to pay if off. There’s no need locking up money in a property when it’s quite affordable to borrow. Not only is the interest low but with the rising inflation rate, his loan payment will get cheaper over time. The mortgage debt is also a tax-deductible expense for him. In short, it made sense for him to borrow instead of buying.
That sums up why you should get into debt. Not all debt is bad. It’s possible to make money from debt as seen in the illustration above. It’s a skill that requires patience as it takes time to master. It’s also risky but again you can’t expect a reward without taking any risks. Hope you were inspired by this piece. Let us know your thoughts in the comments. If you need more insights, please drop a question HERE. Also, don’t forget to SUBSCRIBE to our blog.
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