Often debt can do more harm than help. But there are debts that can help you amass wealth.
If you are like most Americans, chances are you have some form of debt. The average amount of personal debt in the country was upwards of $38,000 last year, according to Northwestern Mutual. If you include loans and mortgages, this rounds up to $136,206 in average outstanding debt per household. While this can paint a dreary picture, this doesn’t necessarily mean that debt is bad.
Debt is debt. It’s a necessary financial tool to accelerate growth in businesses and act as a catalyst to help individuals purchase necessary things like a car or take out a mortgage. Debt in itself is neither bad nor good. What’s bad, however, are the types of debt that are misdirected or don’t contribute to your long-term financial goals. On the other hand, good debt helps you leverage what you have today to invest in your future. In short, good debts are investments.
How can good debt help you build wealth? Here’s how:
Cut down bad debt
While the real median household income in the United States has been rising , it trickles down the drain when you accumulate bad debt. Credit card debt, for example, has high interest rates making it easy to lose money along with any chance of investing. Getting out of these debts should be your immediate goal, so your investment and earnings go to your savings.
Student loans and mortgages have low interest rates and are good debts as they’re long-term investments. Structuring debt repayments where you settle high interest debts first and then concentrate on low interest debt after is a good way to start.
Leverage what you have to invest in real estate
With the current Fed rate cuts, average banks offer interest rates lower than 1%. You can’t amass wealth on that. On the other hand, a low interest rate environment means more opportunities for investment.
Investing in real estate requires a significant amount of money and can put a major dent in your savings quickly. This is why loans, when managed correctly, are a great way to snowball investments in real estate. However, not all loans are created equal and everyone will need a loan that is suited to their situation.
One such loan is a title loan. Here in Los Angeles, the LA Times reports that the laws have changed regarding title loans to make them more beneficial and safe for borrowers. This makes sense as more people are using title loans to finance their homes and investments. Title loans leverage what you have to quickly secure investments that, like properties, require large sums of money. Across the United States, interest rates for title loans in Cincinnati are competitive, making them ideal for anyone looking to borrow large amounts of capital. But this isn’t the case in every state or city, as it tends to change state by state, so make sure to make comparisons before considering taking out a title loan.
Alternatively, you can leverage your 401(k) for a quick loan with lower interest rates. But keep in mind that money removed from your 401(k) will also miss out on potential market gains, so repay it as soon as possible.
Leveraging in stocks investments
Margin debt is good debt if you know what you’re doing. Investing in stocks and bonds is the fastest way to build wealth today. But leveraging on the stock market can increase it even more. Leveraging enables investors to invest only a fraction of the cost of the stocks that they buy. Borrowing on the margin means using what you have to buy more stocks. When your predictions are correct, this can snowball your wealth faster.
But it’s risky too. Play your cards wrong and you may end up losing more than you invested. This is why you shouldn’t leverage anything that you can’t afford to lose like your home. Instead, invest your cash savings and leverage them.
Founder of Lyn Alden Investment Strategy Lyn Alden highlights that leveraging isn’t for everyone. She notes that it boils down to how close you are to retirement. Taking out loans and leveraging while you’re young can help you amass wealth fast. However, the goal is to increase your equity and minimize debt, whether good or bad, as you approach retirement. This is why you need to make sure that you are making this investment at the correct time.
The best way to take advantage of good debt is seek out expert advice and build a plan that will reduce any financial risk. While debt has a bad name, it can be used as the springboard to wealth.