Yesterday we got an interesting email from a guy named Tom. He challenges our articles and ideas about saving money and investing savings. Tom is sharing the idea that rich people never save money – they make money out of the money of the others. Borrowing money with low interest and investing them into profitable assets.
Tom really has a good point so in this article we will cover how and why debt could be considered something good and could earn you a fortune.
1. Not everyone has enough capital to start their own business
If you have a brilliant idea or discovered a profitable niche waiting for your savings to grow until you invest in it might be not so clever. In the best-case scenario, somebody might get into the niche or simply steal your idea and make it true, benefiting from it. Timing and execution are the primary reasons behind each success story.
Also, if you have a working business model and you want to expand on it, then basically debt could be a better option to go and get capital instead of waiting for your savings to grow up. This is true, especially if you don’t want to give away equity. A lot of business owners prefer to keep most of the ownership to themselves and build the business from the ground up. After all, it’s their idea, their dream, and their sweat and tears.
2. Borrowing money to invest in real estate
Real estate is thriving most of the time, and although it might be slow and dependent on the country or region, as a rule of thumb a property nowadays cost much more than 20-30 years ago. In some countries and regions, it could be more than 300% increase in the value.
If you want to invest in property, make sure to do some analysis to make you can use it as an investment. So, when you borrow money the tenant or if it is a commercial property then the business owner who is renting it is going to pay you a monthly rent. Using this income, every month you would be able to cover the payments on your debt and probably even have a little bit of cash leftover.
3. Borrow money only if you will be generating wealth out of it
If you know how to use and invest money correctly, by any means debt is your friend. It is important to remember - every time you borrow money you need to understand that you have to have the money to pay for it. Therefore, it's important not to borrow money if you just want to go and buy presents for your family, but only if you are going to invest and make more money out of it. The only time that you should borrow money is if you know that you can create enough cash flow from that debt to pay off the debt.
4. Borrow money when your business has a minimum 30% return out of it
If you own an Amazon business or Shopify, or even a regular convenience store and you know that whatever money you put into the business - you can make a minimum of a 30% return on your capital, so you should be able to pay back your debt with that money and be able to grow faster your investment, than debt is the best way to go.
5. When you borrow money you leave most of your cash for emergencies
You are not depleting your actual cash flow and actual cash so in any case of unforeseen events, you would be able to stabilize faster and not lose your business to an unfortunate event.
If you ever have a down month, or you need to get more supplies or if you need some equipment it's best to have a little bit of money saved for your business. Most markets and environments are unpredictable, and there are always good months and bad months
A good example is the retail business. Usually, the Christmas season is strong, so November and December are usually profitable. At the same time in January the sale drop and then throughout the year they're more or less consistent, depending on the type of business. Some businesses have a strong summer, while others are growing over the winter season.
6. You can use debt when it comes to leasing
There are a lot of business owners who need better machinery or equipment for their business. They are usually expensive, and it is much better for some business types to consider leasing, instead of permanent purchase. Your business will save thousands of dollars if you just lease and will only be paying for the time that you're using the equipment and the machines and when you don't need them anymore, depending on your lease contract, you can return it or you can exchange it.
Very often that's a 100% tax write-off and when it comes to the debt you borrow to pay for the lease it's 100% percent tax write-off so you're getting a tax advantage and you're able to grow your business a lot faster. That’s why many business owners, as Tom mentioned, prefer debt when it comes to growing wealth than anything else
7. You can borrow against the business
That's cool. It is a good idea to keep your personal and your business separate. This is a very strong foundation for your business so your business can borrow on its own merit. When you're borrowing against your business idea then it is possible to have the business as a warranty.
If you try to borrow money on a personal side, the bank will ask you about your credit score (we covered in the previous article). Your credit score needs to be good; you need to have low utilization rates, and you need to have enough income to support the monthly fees and taxes.
The other way to borrow money from the bank is through a balance sheet, from your business.
A balance sheet shows the bank your financial education and if you are borrowing from the bank, they want to check how much cash flow is coming in; what's your business model like; how much debt are you going to be taking on; who's going be paying for that debt.
Therefore, you need a financial statement and balance sheet and if you can show the bank that you did your homework and your financial IQ is good then they can lend you even more money.
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As a conclusion, it is true that the richest people in the world use debt to generate more money than anything else. After the gold standard removal, and the inflation rate skyrocket – many see money as plain pieces of paper already, without any value. So, having such a mindset helped the rich borrow huge amounts of debt, invest smartly in something more tangible, and generate huge amounts of profit. We would also like to warn you to be careful though. Make sure you have a good plan and profitable place to invest the debt, otherwise it will just be a liability to you and not bring you any benefit.