“If a man has money, it is usually a sign, too, that he knows how to take care of it; don’t imagine his money is easy to get simply because he has plenty of it.” – Edgar Watson Howe (Country Town Sayings, 1911)
It’s a common misconception that borrowing money is bad. I’ve had students proudly tell me at seminars that their only debt is their mortgage and that they pay cash for everything else.
While it’s good that they have no consumer or credit-card liabilities, these people are not going to get wealthy until they change their attitude about debt. Used properly, debt can be one of your greatest wealth-building tactics.
Wealthy people, you see, consistently use other people’s money to make more money for themselves. After more than 15 years as a real-estate investor and business owner with a net worth in the millions, I still never use any more of my own money than I absolutely have to when I’m executing business deals. And neither should you.
The other aspect of my debt policy is that I rarely, if ever, use anything but totally disposable income to purchase depreciating assets. I don’t buy clothes or household furnishings with borrowed money. I don’t finance my vacations. If I can’t pay cash, I do without until I can pay cash. You should too, especially in your early stages of building wealth.
My rule, essentially, is this: Borrow money only when you can use those funds to make more money.
Use borrowed money to invest in income-producing assets — preferably ones that show a positive cash flow, meaning that you have money left over after making your loan payments and paying your expenses each month. If you borrow money to purchase a rental property, for example, your rents must be higher than the total of your mortgage payments and expenses.
If banks or credit-card companies try to lend you money and you don’t need it, don’t take it. Ask them, instead, if they will establish a line of credit so you will have quick access to the funds when necessary — but never borrow money you’re not going to immediately use to make more money.
There’s a reason, you know, that you’ve never seen any of the major credit-card companies run a commercial that suggests you use your credit card to invest in a good piece of real estate. It’s simple: If you make a few good investments and start building your personal wealth, you’ll have enough money to pay cash for the things you want and you won’t need to use your credit cards.
The problem with credit cards is not the high interest rate (they deserve to charge more, because they are offering unsecured loans at a higher risk level than other types of loans) but rather what people buy with plastic.
That brings me to another valuable lesson I learned about borrowing when I was just starting out: Interest rates don’t really matter.
Let me explain what I mean. When I was young, not too long after I’d reached financial independence and quit my job, I applied for a loan at the bank I’d been doing business with since I first got started at the age of 20. I was surprised when they turned me down and totally shocked at the reason. They said I was growing too fast, and they thought I should slow down.
I pointed out that my property business was in beautiful condition — every unit was rented, every building was profitable, and I was making all of my payments on schedule. If anything, I thought, I should speed up so I could make more money, both for myself and for the bank.
I was so insistent that they finally agreed to the loan, but at a much higher rate. They charged me 16% when interest rates were fluctuating between 7% and 8%. I was too naïve to know I could negotiate this. But it didn’t matter.
Here’s the point: With real estate, if you have money left over after you pay your mortgage and expenses, don’t worry about the interest rate. When the banker offered me the money at 16%, I did the calculations and found I’d still have a 100% return on my investment in the first year — even paying twice the going interest rate.
Insisting on the lowest interest rate, in other words, can stop you from making money. Though I do try to get the lowest rate I can, I’m willing to pay more if I’m going to get a good return on my money.
It’s something that wealthy people do — and most people who are stuck in the middle just don’t understand.