Episode Show Notes
IN THIS EPISODE
Today’s episode is inspired by one of our very own entrepreneurs inside the disruptor, as we bridge the gap between a safety mindset to a strategic mindset and tackle the question WTF is good debt?
Making Money From Debt
It is totally normal to view debt as dangerous, to view debt as something that can mess up your future. If you’re anything like me, you probably grew up hearing messages that debt was bad. “Credit cards are evil” and “Loans mean you’re poor”. Taking on debt basically meant you were in an inescapable hole, aka “snowball debt” that would be extremely hard to dig yourself out of. But what about good debt and something called snowball wealth? The same concept that applies to debt applies to wealth.
If you look at any billionaire these days, you’ll not only find they have debt, but they’re actually making money from their debt! This is what we categorize as good debt. Now this message may be hard for your subconscious to hear, since most of what we’ve been told surrounding debt and money are… well… lies. So let me start by saying it’s ok if it feels tough to bridge this gap and that is exactly why this podcast exists, to surround ourselves with messages that make money easier for us.
How a Thriving Entrepreneur Views Debt
Successful, thriving entrepreneurs view and think of debt as buying money. So let’s look at an example to further break down this concept. When buying clothes… you can go to Walmart, Target, or Nordstrom. You can buy a similar top at each retailer, but the price tag will look a little different. Now let’s replace clothes with going to the bank and buying money. You can go to an investor to buy money, or you can go to a credit card and buy money. Debt is simply shopping and buying money.
Variables To Buying Money
There are two variables that decide whether or not buying money, aka taking on debt is strategic… that’s the cost of buying the money and the return on investment (ROI). So how do you determine the cost of buying money? Let’s refer back to our retail example. That cute top at Target is $20, and you think, “ok that top is worth the $20 to me.” On the other hand, a similar top at Nordstrom is $500, and in this scenario, you might pause and think, “Is that really a good investment or not?” This concept is the same when buying money.
So how do we determine the cost of the money we’re buying? It’s the interest rate. The interest rate dictates how much you pay when buying money. For example, if you want to buy $100,000 at 2%, you pay $2,000, or $1,000 at 20% is $200. The question we need to ask is, what’s the ROI when you purchase this money. What’s the plan to make more money from the money you’re buying… right? Debt with a disadvantage is buying money at a high cost that has no plan to make more money. In the world of finance, this is called buying liability, and liability doesn’t produce value.
Debt with an Advantage
Buying debt with an advantage looks like buying money at a low cost or a cost that is covered by how much money it will make. This is where you’re buying an asset. It’s something that makes you money. We’ve talked about this before in previous podcast episodes, this is also called a money maker. It’s something you own that makes you money, but it doesn’t rely on you to be successful.
Having a Financial Freedom Plan
So we know that skillful debt is making us money, whereas not-so-skillful debt is not making us money… what it really comes down to is the result you want. I’m not saying liabilities are bad… in fact, most of us have them, but this is where having a financial freedom plan comes into play, using a wealth manager. This set it and forget hands off approach allows you to access cheap money when you need it, because your portfolio can collateralize a loan, and bankers pretty much drool over that! This is part of planning wealth from every angle! If you’re interested, I am happy to share my personal wealth manager’s contact info, if you’re currently bringing in over $3,000 per month in revenue. Just DM me @haleyburkhead.
This is an amazing opportunity to set yourself up to be in a great position three to five years from now. This is part of the secret advantage of entrepreneurship, offering some pretty cool early retirement options.
One Decision Can Make All the Difference
So let’s walk through a scenario where one decision can make all the difference when it comes to debt with a disadvantage vs. debt with an advantage. We’re using Molly and Laura for our case study. Molly is afraid of debt, and Laura takes risks only when it’s profitable.
Molly finds a 4 million dollar home she loves and buys it in cash to avoid a monthly mortgage. Laura, on the other hand, puts $800,000 down (20%) and has an interest rate of 3%. The rest of the money is put into a wealth portfolio. From a strategic standpoint, this allowed her to get a lower interest rate since she was able to use her portfolio asset to buy money for a cheaper cost, and she’s able to pull $7,000 a month as a paycheck from her portfolio while the money grows, which covers a huge portion of her mortgage.
Now let’s really nerd out and jump forward 10 years! Molly’s net worth is 5.1 million, based on the appreciation of her house. Laura’s net worth, however, is 11.4 million! That’s more than double what Molly’s net worth is! The house appreciated at the same rate as Molly’s, but her portfolio assets grew to 6.3 million… doubling in 10 years! That friend is the power of wealthy decision-making.
Using the Rules of the Wealth Game
In this example, buying debt was well worth the money. This is exactly how wealthy people think about money. Wealthy people don’t put labels and boxes on everything… instead, they think about the rules of the game and how to use those rules to their advantage! That mindset is so different than just labeling something like debt as bad… that’s so limiting. It’s not about whether something is good or bad, it’s about whether it’s skillful or not skillful based on the results you’re looking for.
These are the strategies that millionaires and billionaires use every single day when they make deals, buy properties, and grow their money… and we can use these same strategies too. There is no right or wrong decision. The key is to do what feels right for you and ask yourself if that choice is going to lead you closer to wealth.
I hope you enjoyed nerding out over WTF is Good Debt and found this episode super helpful! Thank you so much for listening, and we’ll see you next week when I dive into profit margin strategy and your business!
00:48 – Making Money From Debt
02:10 – How a Thriving Entrepreneur Views Debt
02:51 – Variables To Buying Money
04:53 – Debt with an Advantage
10:28 – Having a Financial Freedom Plan
15:33 – One Decision Can Make All the Difference
22:27 – Using the Rules of the Wealth Game
CALLING ALL DISRUPTORS
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