I can hear you saying..”how can debt help me become rich?”. This concept may be difficult to understand when you are struggling with lifestyle debt. Credit cards, store cards and car finance can make your life a misery. Many people will go to great lengths to become debt free. While it is a good idea to be free from some debt, it can be done using debt consolidation ( click here ), other debt can yield financial rewards.
Differentiate Debt
“Debt that does not contribute to your assets or income levels is negative debt which should be reduced as soon as possible.” – Consolidation Deal team
This may be your wedding loan which is now lingering beyond the span of your marriage, holiday loan, credit cards and store cards. Such debt is reducing your ability to grow your wealth.
However a debt taken to purchase a home or an investment property is the kind of debt that should generate results over time. The problem is that many people have no patience they want to see immediate results. Investment is a long term strategy. It can be very difficult to predict cycles in the market and sometimes the market will turn against you, however in the long run things bounce back stronger than ever before. These are trends that investment experts recognize and use to their advantage.
Using Good Debt to Create Wealth
Lets take an example of a young man who buys his first investment at the age of 25. It is only a small apartment and he borrows 90% while putting up a deposit of 10%. If the apartment cost him $400,000, that means he has a loan of $360,000. Most property investment located in inner areas of Australian cities are negatively geared, where it is costing a little more to hold than the income generated.
That means that the investor gets to deduct the cost of his investment against his income tax. Lets assume the property is worth $350,000 by the time our buyer is 35 and wants to buy a family home. He can borrow some of the equity from this property and purchase a home worth $400,000, borrowing the rest via a 25 year mortgage. By the time our buyer reaches retirement age, he should have a home worth at least $1.2 million dollars and an apartment worth at least $800,000. These are conservative estimates only.
He should have a paid out both the house and the apartment over the 35 years from the time that he made his first purchase, and be sitting on an asset base of $2 million dollars. A very comfortable retirement position.
This level of debt could not be achieved without investment in property and the related debt.
Debt can be your friend if used correctly.