Debt is often not a concept that the world rejoices over. It is, however, and essential element of the money game and therefore essential to understand. Debt, like taxes, can be leveraged to win in this money game. But like any game, you have to know the rules in order to play.
Debt is a tool (like money, which you can read about in a previous post). As such, there can be good debt or bad debt, a good use or a bad use of a tool. But simply because of that portion of bad debt, 99% of the financial media warns to avoid debt at all costs. Debt has become such a pain point that so many people don’t know how to leverage debt. They don’t know how to use the tool for good. Debt has become a four letter word.
Some of the wealthiest individuals in the world got there (or have stayed there) by leveraging debt. They took on as much as they could handle, or as much as the banks would lend, and built empires. They have built indestructible wealth through leveraging.
So how is it that the majority of the population is told, “Get out of debt, stay out of debt. It’s horrible;” and then a whole other group takes on as much debt as possible and actually uses that to build wealth? First, it must be restated — there is bad debt, and there is good debt. Many people work hard to avoid bad debt, and that is good. We all know examples of bad debt: student loans, auto loans, mortgages, personal loans, credit card balances. Consumer debt is a huge red flag. And the reason it’s bed? Because this kind of debt actually takes money out of your pocket every single month.
The Definition of Good Debt
If you’re thinking it sounds crazy that debt could put money in your pocket, we’d understand. It sounds crazy, but if you refer to our previous post, it’s actually how the Federal Reserve and commercial banks make money. So why can’t it stand to reason that an individual could do the same?
Good debt puts money back in your pocket every single month.
It takes a high financial IQ. It’s done by leveraging the money of an institution to acquire an asset that produces cashflow — a flow that both services the debt and provides a surplus. Like the banks, you’re putting one dollar to work multiple times. Because it takes a high IQ, however, it’s not something just anyone can do. It often requires a collaboration with a tax expert or a deep study of taxes and debt.
If you can take your debt and create an income stream, you’re on your way. You can both achieve financial freedom AND be up to your eyeballs in debt. And net worth? Your net worth could be at zero, and you have more financial freedom that someone with a high net worth. It’s not cash that is king, it’s cash flow.
To implement these advanced strategies, as with sports, you’ve got to study the key players. In this case, the wealthy — and not just those with a high net worth. You have to look for the financial players that have achieved financial freedom and take notes.
The Flip Side
As we’ve stated before, debt is merely a tool. It is not inherently good or evil, which is why you shouldn’t be afraid of all debt. But debt can still enslave. You are the driver, and you must be aware of both sides if you’re going to get where you want to go.
Think of it this way: if you produce more than you consume (if you make more money than you have in bills) you’ll have a degree of freedom. If you then amplify that value through other means, such as leveraging tax code to create housing, you can create even more value for yourself (and probably others).
If, on the other hand, you consume more than you produce (or consume about as much as you produce), you’re at a deficit. Debt becomes a crutch that you rely on to sustain your standard of living. You aren’t improving your quality of life, but just maintaining it; and because you’re barely making ends meet, you’ve ensnared yourself in a vicious cycle. You may never get out of that debt, because you’re always a pinch behind. In this model, you’re slowly driven into more and more debt. In this model, you’ve become a liability to yourself. The first step to getting out of the cycle is to become your biggest asset.
Becoming an Asset
Being your own biggest asset can seem abstract, but really it is a testament to the first model of production. How much value are you creating, and how much are you leveraging that value to create even more? Many of the best success stories start at a place of indebtedness, because the people in question didn’t just dig themselves out, they learned how to become an asset. They honed their skills, used their specific insights and knowledge, and created value in the world. And then they kept the momentum going by leveraging their surplus to create more wealth.
The first step is self-reflection: how can you become an asset? The second step is absorbing knowledge and learning. The third step? Don’t be afraid to use the tools you have in a surprising way — don’t be limited by the “minor-league” way and study the pros. This is how you’ll find financial freedom.
You can listen to the podcast episode I recorded on my new show, Cashflow Investing Secrets here.
Live your Freedom, Live Your Legacy, On Your Own Terms,
M.C. Laubscher is a husband, dad, podcaster & Cashflow Specialist. He helps business owners and investors create, recover, warehouse & multiply cashflow. You can learn more about exclusive cash flow strategies in M.C.’s new video series at https://www.yourownbankingsystem.com/
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