Debt that Makes You Rich

by Living On Dividends

Growing up, I thought all debt was bad.

I received a $2 allowance every Sunday when I was little. Meanwhile, my parents bought our cars used, grew vegetables in our garden, and even painted our house and built a deck on it by themselves. They had no debt. And one day, I had $200. I soon adamantly declared that I’d never take on debt. Debt, you see, is bad.

But when I became a business owner, I quickly realized that I was wrong.

Debt is not always bad. Debt can be good. It can help business owners accomplish feats and make more money than would otherwise be possible. I realized:

Two types of debt exist: debt for consumption and debt for investment.

My parents were smart to stay out of hock. Any debt they would have taken on would have been debt for consumption. It would have only increased the total cost of anything they purchased. Consumer debt would have made their bankers a little richer, but it would have cost them that much more.

As a business owner, however, debt for investment is good. It is a powerful tool and can increase your return on investment if used wisely. Here’s the trick:

Is your business’s rate of return (ROR) greater than the interest rate at which you can borrow (APR)?

If your rate of return is GREATER than the interest rate at which you can borrow, you will make money by using this debt. Your profits will increase beyond the cost of this debt. This is good debt.

If your rate of return is LESS than the interest rate at which you can borrow, you will lose money using this debt. RUN AWAY from this debt. It will hurt you and your riches.

Good debt makes you richer. It does exist. Just don’t forget to make sure that it is actually good debt first.


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