Using Debt to Get Wealthy?

Using Debt to Get Wealthy?

Written by Caitlin Wood
Last Updated October 21, 2015

Debt typically has a bad reputation, no one wants it and everyone has something bad to say about it. So how could it possibly be used to help you get wealthy?  How do you go about using debt to create wealth? And is there a rule of thumb when it comes to using your debt to accumulate more wealth?

First and foremost, it is important for you to know that there are two types of debts, namely good debt and bad debt. Good debt is the one that is likely to make you more money when invested wisely, for instance debt that you take on to invested in real estate. Bad debt does not add value to your worth or life in any way. Credit card debt is an excellent example of bad debt, the kind of debt you want to try to avoid at all costs. The type of debt that is likely to make you more wealth is good debt. The bottom line is debt can be good or bad; you can either use it as a tool to help yourself financially or hinder yourself financially.

Here are a few ways you can use debt to your advantage, turn it into a way to create wealth and boost your household income.

Finance an Asset

One of the major mistakes people make with debt is that they accumulate by spending money they don’t have on things that don’t need. Taking out a loan to finance the purchase of an asset is a much better idea than taking out a loan to finance an expensive vacation. Finance something that is an absolute necessity or finance something that will make you off of in the long run.

If you absolutely need a car to get to work or drive your children to school or to help out your family, then a car loan is a good kind of debt for you to have. While a car loan won’t technically make you wealthier it’s still an asset that will improve your quality of life.

Now if you want to use a loan to become significantly wealthier you’ll need to use it to invest in something that you’ll get a return from. This could be a piece of land, a house or a start-up business. Going into debt for any of those things is a great way to potentially increase you wealth.

Treat Debt like an Investment

Most people take investments very seriously. They understand that investments are risky and that they need to protect themselves against any losses. You need to perceive your debt as so. You have to take into consideration the cost of the loan that you want to take out. Are the interest rate and the payment plan going to cost you so much that it’s not worth it? Weigh the pros and cons when it comes to debt, loans and credit just like you would weigh the pros and cons of an investment, this will help you determine what you can truly afford.

Use Good Debt to Pay off Bad Debt

If you currently have a significant amount of high interest credit card debt then you need to figure out a more cost effective way to pay it off. One way you can do this is by using a good kind of debt to pay off this bad debt. You can take out a home equity loan, which typically have lower interest rates and better terms than a credit card, and use that loan to pay off your debt that it costing you way too much money. You’ll now have a home equity loan to pay off but you’ll be saving money, which will increase your personal wealth.

Make Savings Work for You

Saving is great and you should be saving as much as possible every time you get paid or come across some extra cash. So if you’ve recently invested in something and there was a return or you’ve taken out a loan, take that extra money and invest it again. Always be looking for ways to make your savings, your income and your profits work for you. Don’t just let your money sit around, invest it further and increase your wealth even more.

Live Within Your Means

The last way you can make debt work for you is by not having any. If debt has been a problem for you in the past or you know that you want to live a debt free life, avoid it as much as possible. Living with no debts will automatically make you a wealthier person than someone who is constantly trying to make ends meet because of loan payments and high interest credit card payments.

Debt is a Means to an End

Debt is a means to an end; it should not be controlling your life. It should be treated as a tool to help you achieve goals, increase your wealth or improve your quality of life. Commit yourself to using debt in the best possible way and then pay it off as soon as possible.

Rating of 4/5 based on 14 votes.

Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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