Use Debt to MAKE Money
The principles of this are simple – take on good debt at a low interest rate and invest it into something that goves you a higher ROI, i.e. a higher interest rate – then you pay back the loan and keep the difference!
If however you are still in a lot of debt that’s charging huge sums of interest then please read “get out of debt fast” and look at my actions plans to help you get clear of BAD debt before you start looking at how to get and use GOOD debt to generate cash.
If however you have executed all the advice and resources available to you to optimise your income, minimise your outgoings and hopefully improve your credit rating, you can now start to use other people’s money to make some for yourself.
There is a HUGE caveat with this in that you really shouldn’t do it if you are not comfortable, you should also be very careful how you invest the money, keep the risk as low as possible which of course is always an important factor but it is especially so in this case as it’s not your money!
Taking on debt, any debt, even the lovely low cost, long pay back lead times kind of good debt, is always a risk so it’s really important to keep it balanced. If you ever owe more than you have in assets or savings then you are in debt.
Remember - this is a business model not a licence to spend.
As a disclaimer please note that this does not in any way constitute financial advice.
Before you do anything please get actual advice from an independent financial adviser. This tactic is just something I have employed in the past to make a little bit of extra cash and over the years I have found a number of other advantages in structuring my finances and using debt in this way, these include:
- Having available funds to take advantage of short term investment opportunities (e.g. short turnaround on tangible assets such as cars, real estate or auction items)
- Being prevented from going under or needing to borrow as a knee jerk reaction to demanding life events such as having kids or being out work through extended periods of illness
- Being able to muster deposits for houses in very short time scales
- Being able to maintain a decent credit rating despite how broke I am as I have never missed a payment – EVER!
- Getting better mortgage rates because I have a long term very good credit record
- Reducing my LTV on mortgages to get better rates whilst paying 0% on credit cards
- Being able to afford to develop properties by using cheap credit cards or loans to add value to them before i sell them on or let them out.
If you get this concept and you are comfortable with the management of it, you might want to think about how you can start to MAKE money by having debt and start things about the myriad of ways you can create value in existing or new assets, use the cash to generate income or simply invest in something that you know will produce a return before the debt has to be paid off.
Taking on debt and cash flow
Always keep in mind that this entire venture is about ending coming out of the end with MORE money than you went in with. If you take on a debt (even good debt) that suffocates your cashflow and causes issues – expensive issues – in other areas of your life or business, then this entire endeavour could become a futile exercise. i.e. not worth the effort!
Watch this video about cashflow – it’s a great explanation.
Protect your credit score
Please make sure that you:
- Don’t use more that 49% of your available balance
- Don’t apply for loads of new cards in a short period of time (too many HARD credit searches looks very bad!)
- Don’t take on more debt than you can service, i.e. you might be able to get $10k out of some existing and / or new cards on 0% but your minimum monthly payment to them would probably be about $200. Make sure you can afford this within your budget – defaulting would be a very very bad idea.
- Do set calendar and phone alerts for when the 0% runs out, letting these cards fall into interest charging instead of being the interest generators would not be good.
- DO invest the money safely; remember it’s not really yours.
The simple way to make money from debt
In order to demonstrate the principle in the simplest possible way I am going to get in my time machine and go back a few years to when a savings account would pay you 5% interest on your money…….
When you have stopped rolling around the floor in laughter or crying into your GnT, let’s move on.
I’ve discussed using 0% cards to pay off higher interest ones in some earlier posts. If you’ve already done this or are debt free, you can now transfer a 0% card balance into your current account.
Investment Case Study
As 0% options are become scarce these days you might have to substitute this for a “low rate” loan or credit card option.
The following example shows how a 3 year 0% card with a 2.9% transfer fee on $5k might be used to earn $643 over the term.
So here you can see that you’ve taken $5k out on a 0% transfer for 3 years, you’ve paid $145 to transfer it and you’ve paid the minimum monthly repayments over the 3 years totalling $2,608.
This can of course apply this to any asset that you believe can return MORE from the investment in it than the cost of your loan or credit card interest rates or transfer fees.
When the 3 years is up, you liquidate your savings (total of $5,788), pay off the final balance on the card of $2,537 and bank the remaining $3,251 which; given that you paid into the creditcard over the year, provides you with a ….
…..total profit of $643 ($3,251-$2,608).
All from money that was never yours!
Please remember that you will have to declare this income for tax purposes but if your accountant does a good job you will be able to offset the original loan interest amount and maybe a few other things depending on your personal situation, your business structure, country of residence and the type of investment you decide to enter into.
Invest Debt to Build Wealth
To be clear, this is for investments not for spending on something that you intend to own and use for a long time such as a home of family car – these are not assets that return any value.
A house (or any other purchase for that matter) that you intend to rent out or by any other method, generate cash flow from however would be considered and investment as it would return income by way of regular payments and capital gains.
13 Steps To Turn Debt In To Profit
To summarise what we’ve covered:
Before you start - get debt free
- Get your head in the right place. Taking on debt is a risk and you shouldn’t do this if you already have loads of bad debts!
- Make the decision that you want to be debt free & financially secure. Be very clear with yourself about how much you want it and remind yourself daily!
- If you are not fully committed to the decision; do some work on yourself to understand why. Examine the language you use when you speak about money and get to the root of your subconscious beliefs and expectations. Don’t skip this step!
- Read or listen to some books, blogs, podcasts or watch you tube, there is some amazing content out there these days and it’s mostly free so go and feed yourself with loads of good uplifting and sustaining beliefs. This is especially useful if you know you are surrounded by people who are a negative influence on you when it comes to your ability to handle money.
- Get a practical grip on all your debt, how much you owe, who to and how much it’s costing – and don’t panic, it’s still only money!
- Switch as much expensive debt as you can to 0% or low cost, if you can’t do this fully; get the next lowest possible, find some professional advice, look at debt charities and consider an IVA or bankruptcy if it’s really that bad, but again – don’t panic, there is always a way.
After the Debt Is Gone - Sort your Credit Rating
(Good debt only comes to those with a good score!!)
- Get your credit rating sorted and make sure that the information they hold about you is correct and keep it that way.
- Minimise outgoings and maximise income. You don’t have to achieve this all at once but have a timed plan of when you with take action on each step.
- Do one small thing every day that aligns with your new goals.
- Decide on the maximum monthly “payment” you can make to your “future you” pot. This might be for clearing debts or regular investment deposits, or both. Either way, decide what you can afford (at a stretch) and put it in a separate account.
- Finally get some free or really cheap debt (in line with what you can afford to service each month) and use that debt to buy assets at the lowest possible risk in a higher interest fund or account.
- Check weekly, then monthly to make sure it all stays on track
- Retire rich and happy!
Millionaires leverage debt all the time
If you remain unconvinced that using debt to make money is a real thing, watch this multi millionaire explain it……..
He, and many other successful business people have used low cost loans to leverage their finances to create wealth from a wide range of investments.
If you have ever read pretty much any of the money related book, they all speak about leveraging other peoples money, all I’m doing is using it on a much smaller scale.