How to Use Debt to Generate Income (Explained for Beginners)

It takes money to make money. However, many people that want the finer things in life, nice houses and nice cars, don’t have the starter money to get there. Smart and disciplined people do what you might consider unwise-they take on debt to grow wealth. With the right debt-handling techniques, you can transform your net worth faster than you ever thought. Let’s learn more.

First, let’s talk about being rich, and later, we’ll see how to leverage debt to get there. What does being rich mean to you? It could mean having the latest toys to play with, exotic vacations, and magnificent homes.

That’s not an entirely accurate definition, but rather the side effects of being wealthy. Being rich is having a steady large amount of income. It is having your investments work for you so consistently that you never go back to touching the original investment (the principal).

Using debt to grow wealth

Time to unlearn what everyone has taught you. Debt isn’t always bad. You can leverage debt as your launchpad to success. You often hear people and even financial experts advising you to stay off debt and live an utterly debt-free life. Ignore this advice. Most 1%-ers used debt to get to where they are. They continue to leverage debt to grow their wealth. Why not you?

Bad debt vs. Good debt

Not all debt is good. You have to be smart about it. For instance, taking a loan to buy a flashy car, how does that make money for you? Good debt is money you borrow to put into things that can continuously generate wealth for you. These include cash cows such as rental real estate and high-dividend-paying stock.

Bad debt is money you borrow to put into things that don’t generate income for you. This list includes consumer debts you accrue on your credit card.

The concept of leverage

Experts call it leverage when you borrow money to put into business or invest in stocks or real estate. You must be sure of an increase in investment return before you borrow money for whatever you have in mind.

When the returns you reap from what you put the money into are higher than the borrowed funds +interest, you are in the black. While you could still use the small amount of money you have to get a profit, leverage widens your capital base so you can make massive profits.

Leverage example

Let’s pretend that you have $2000 in your account right now, and you can borrow $ 4000 from the bank at an interest rate of 5% to put an investment deal that you are sure can give 20% in a year.

At the end of the first year, your investment value (principle $6000) would be $7200. From that, you will pay back $4000 + $200(interest), leaving you with $3000 ad a net gain of $1000 once you subtract your own initial $2000.

Now, if you were to invest your $2000 and avoid debt, your net gain that year would only be $400. The $1600 difference makes going into debt worth it. This difference grows even bigger for long-term investments.

How can you use debt to make money?

Making money using debt is easier than you think. There is a risk involved, of course; however, to increase wealth, many can successfully use debt to obtain even greater wealth.

Time is more precious than money

Significantly few people ever saved their way to financial freedom. There is just never enough time; instead of focusing on saving for your 401K, try radical pragmatism and borrow a bank loan to buy real estate property or expand your stock portfolio.

The trick to successfully use debt to grow wealth is doing thorough risk assessments. Choose businesses or investment ventures that are sure to give you a higher return than what you put into them. That will enable you to repay the loans and walk off with large profits. Discipline is a critical requirement; if you borrow money to buy or build property, it is essential to use it for its intended purpose.

Why debt is good. How the rich make good use of debt?

It forces you into meaningful savings: Not many people are greater savers. But if you take a loan to buy property, you will focus on repaying the debt with a higher level of seriousness than you do with saving.

Debt is future-proofing: Leverage is a long-term wealth generation technique. For instance, if you want you to want to earn a passive income of $1million annually during retirement, you can leverage debt to acquire a $2 million property with a rental return of 5%. Debt is tax-deductible: Interest that you pay on a business or property loan is tax-deductible. Saving, though a healthy strategy, doesn’t lower your taxes. Debt keeps you on high alert:

When you are in debt, your mind focuses on breaking even fast to repay it. This helps you focus on effective investment strategies. Debt is cheap finance: Interest rates are historically low. Failing to capitalize on debt is not a smart move.

How to use debt to your advantage

The golden rule is this: avoid bad debt. The money you borrow must be put into something that gives you a sure and considerable return. Learn to be a risk-taker: The first step is to unlearn the idea that debt is bad. Overcome your fears and embrace the math. Use debt to start a unique business: If you have a killer business idea, don’t sit on it. Getting a short-term business loan can help you create and grow your business. Before you take the loan, though, carry out intensive loss and profitability assessments.

Use debt to buy property: Leverage happens more often than you think. People get loans to purchase homes, Uber cars, and other income-generating assets. If you take a loan to buy a fast-appreciating piece of real estate, you could make your first million sooner than you think. It could be a rental or flip and sale.

How can you use debt to make money?

Margin trading: Margin trading is buying securities with borrowed money. If you own a few securities in your stock trading account, your broker may be willing to give you a loan using these assets as collateral. You then use the money to buy highly profitable ‘blue-chip’ stocks that end up paying the loan and leaving you with a tidy sum. If you choose this strategy, be sure to focus on stocks that have high dividend yields.

Leveraged ETFs: Index trading involves speculating on the rise or fall of a stock, bond, or foreign currency and staking money on your prediction. EFT brokers like ProShares allow investors to magnify your prediction by up to 300%. In essence, they lend you money to buy more options and futures than you would with your own investment money

Hedge Funds: Many hedge funds allow leveraging for up to 10 times your total assets. In other words, you leverage your broker’s money to multiply your returns. Billionaires like John Paulson have used leverage in hedge funds to generate millions.

How to use debt to create passive income

Passive income is not time-intensive. It is not labor-intensive. This is money you earn when you are sleeping or off on vacation. It is when money works for you. Here is how to make debt work for you:

Real Estate:

You can build passive income by borrowing a loan to invest in real estate that you can rent out to tenants. Managing a rental property can be quite involving, but it’s not as time-intensive, as say, operating a hardware store.

High yield stocks:

Choose stocks that pay quarterly dividends. Stocks take zero % of your time. If you choose the right stocks, the prices are likely to rise every quarter. This gives you an income in the form of dividends even as your principal grows.

How to use debt to buy real estate

Make a bigger down payment: The best way to use leverage in real estate is to put in your own money in the form of a down payment-the more the down payment, the lower the interest.

Avoid risks: Buy property at the right time at the right place. You have to sit down and analyze trends. If you see that property values are dropping, you might want to wait until there are indications of appreciation before you buy.

Have a strategy for increasing occupancy: In the case of rental property, low vacancy rates can be detrimental to your financial ambitions. Before you go into real estate, design a solid plan to increase and maintain income generation with the property.

Choose the right mortgage: There are various types of mortgages, including variable rate, standard variable rate, and fixed-rate mortgages. The latter is the most recommendable type for investors looking to use leverage in real estate. With fixed-rate mortgages, you pay a flat interest fee for the entire lifespan of the loan.

FAQS

Can you write off debt on your taxes?

All interests that you pay in your good-debts are tax-deductible, not so much for consumer debts. So the interests you pay on a mortgage or investment money for stocks or bonds can be written off your taxes.

How can I avoid paying taxes with debt?

You have to show the records that you used the money for investment, growing your business, or funding your education. You can claim the interests on Schedule A of Form 1040. The exemption threshold for all interests is $375,000.

How can I build wealth with no money?

In a nutshell, to grow wealthy with no money, you must leverage debt by borrowing money to invest in profitable ventures. Borrowing money for real estate is considered one of the smartest wealth creation moves.

Can good credit make you rich?

Good credit can help you become rich. By taking loans and repaying them in time, you will obtain bigger loans with more minor interests in the future.

Using the strategies earlier explored, you can keep leveraging to grow your net worth exponentially.

How can leverage make you rich?

Leverage gives you money to invest when you don’t have enough. Leverage gives you the advantage of a broader capital base which works like a charm in the money markets and real estate. If you are directed towards a suitable investment, debt is good.

What do rich people do differently? The answer is simple: rich people leverage debt while the rest of us shy away from it. To grow wealthy faster, you must embrace good debt.