The Difference Between Good Debt And Bad Debt | How To Gain Financial Leverage Through Loans

Epic Real Estate

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When people think of debt, they’re usually thinking of what’s called “bad debt.” However, when used the right way, debt can actually give you financial leverage, which can make buying properties much easier. Think of debt as being like a hammer. A hammer can destroy, but it can also be used to build things when used properly along with nails. When you use debt for the wrong reason, on the wrong things, you can ruin your finances and destroy your future. However, if you learn to use it the right way it can accelerate your financial growth and lead to prosperity. Here’s the difference between good debt and bad debt (Dave Ramsey and Suze Orman are keeping this a SECRET, by the way): The bad version is any money you use to buy things that depreciate in value. For example, when you rack up credit card debt in order to buy shoes. Those shoes may look good, but they won’t help you get your money back. Good debt, on the other hand, is money that you borrow in order to make more money. This idea of borrowing money to make money is called financial leverage and it’s what wealthy people do to get wealthier. Here’s an example: Let’s say you want to purchase a 10,000 dollar asset that offers an 8% annual return on investment. You then go to the bank and borrow that 10,000 dollars at 5% APR. By agreeing to that loan, you can net 300 dollars a year without having used any of your own money. The issue with debt is simply how you use it. When you avoid bad debt and focus exclusively on creating financial leverage, you can invest more without using your own money. Learning how to use debt the right way is a great way to expand your portfolio.