Using debt to grow rich

cash flow, Debt, Liabilities, possibility thinking

I had written two posts a few days back on the difference between debt and liability.

As a middle class person, the word debt has a lot of negative ideas. I have had so much credit card debt , housing loans etc. that the very idea of taking a loan or using a credit card is an absolute no-no.

Garrett Gunderson gave a very good explanation of debt versus liability which I explained in the posts earlier. I also wrote in those posts how I am trying to get my head around the ideas of utilising loans – loosely called debt to grow. I did understand the concept that if you are buying a productive asset, to buy that asset you will incur a liability. As long as your assets are more than your liabilities, its not debt. If you invest in productive assets and those assets generate cash to take care of the liability then there’s absolutely no problem.

I came across one video of Robert Kiyosaki – of Rich Dad Poor Dad fame – where he talks about how the rich actually love debt. But he makes a very clear distinction. They have teams who understand and manage the debt such that they are consistently extracting the maximum out of the asset to produce cash and pay off the debt.

This way they are able to grow their assets much faster. They then use the assets to generate more cash, pay of the liabilities / debt and start the cycle all over again. Since they now also have the asset, they are also able to use that asset as collateral to get more loans to expand further. If the assets are non-depreciating like real estate or intellectual property then its even better. What this gives the rich people is leverage to grow faster. it allows possibility thinking. Therefore the rich are growing richer.

This is something which I need to think of, because my middle class mindset is still a little sceptical. Robert also has a caveat to this theory. He is clear that its not ok for everyone to use debt because its a double edged sword. If you don’t have the guts to handle this kind of a double edged sword, then you should avoid debt at all costs.

Tell me your views on the topic in the comments section below. I will look forward to hearing from you.

Till next time then.

Carpe Diem!!!

Debt versus Liability- Part 2 – Happiness

Happiness, Liabilities, travel

In my post yesterday I wrote about how the book Killing Sacred Cows…. by Garrett Gunderson had got me thinking about how I can borrow money for productive use. The issue is that anything can be constituted as productive use

I have been thinking about this as to what could be easily classified as productive usage. So any borrowing for creating an asset that appreciates should be okay. Any borrowing which creates an appreciating asset and also does cash generation should be even better.

If the asset is depreciating but you generate cash many times over then also borrowing should be okay as long as the liabilities you are creating are less than the assets needed to service the liabilities.

Now happiness does not have a direct relationship with creating assets.

But if you are to look at yourself as the million dollar person who creates assets because of your ideas, then a happy million dollar person should be able to create even better assets. So creating liabilities to ensure that you get happy – like going on a cruise to Alaska – which can rejuvenate you and make you even more productive for a long period of time should be worth it.

As Dan Sullivan of Strategic Coach says, you need to put in free time into your calendar well in advance, ever so often , so that you’re operating at your best.

On the other hand a depreciating asset like a designer watch which aids your ego and is purchased by taking high cost credit card borrowing is not ok. This may give you momentary happiness , but soon you will be eyeing the next possession.

For me , I also get happy when I am surrounded by people who are thinking bigger ideas, different ideas or are just plain better than me in marketing or strategy.

Till now I used to wonder how I would finance these meetings and master – minds. This idea of debt versus liability, gives me an ability to do that. Once I am happy and my mind has also been expanded then I can be an even better and more productive asset.

I would think this can open up a whole new way to leverage growth,

Would love to hear your views if you think this makes sense.

Till next time then.

Carpe Diem!!!

Debt versus liability

Debt, Leverage, Liabilities

I have written earlier that I have been reading this book, Killing Sacred Cows…… by Garrett Gunderson.

Based on my own life experiences , where I was in so much debt from all sides , I have come to a conclusion that I will not take any debt for consumption items, especially credit card debt. Wherever I do have to use my credit card, because of “single shot” payments, I ensure that I pay it out within the period of free credit.

Otherwise I am absolutely against borrowing money and taking leverage of any kind.

Garrett on the other hand has come up with a very interesting take between liability and debt.

He says you will always have to take a liability to get an asset. One cannot exist without the other. If the liabilities exceed the assets you have then its debt. You should get rid of this debt at the earliest.

On the other hand if you can service the liabilities with your cash flow and it helps increase your assets then you should borrow. Effectively if you are buying a productive asset rather than a consumption asset, then you should borrow. As per him if you have to leverage your ability to add more assets then you should borrow.

Now in some situations there can be a thin line between consumption and production.

I am right now thinking about how do you go about classifying expenses as being done for productive reasons. Some could be clearly identified such as having one car to improve mobility versus three cars for lifestyle. Even that could be debated by some though.

But how should I look at taking a holiday to get new experiences. The experiences help me de-stress and therefore make me more productive in the long run. Should I be willing to borrow to fund the experiences rather than directly fund with cash and liquidating some assets.

I need to get a wrap around this idea. It could actually be a game changer.

Will keep you posted.

Till next time then.

Carpe Diem!!!