Individuals generally take on debt to finance consumption. However, debt may also be leveraged for wealth creation. Of course, converting debt into wealth requires proper debt management strategy.
Identification
Learn the difference between good and bad debt. Good debt, such as mortgages and business loans, is spent to purchase investments that improve your bottom line. Bad debt, such as credit cards, is used to consume goods and services at high interest rates. Converting debt into wealth requires that bad debt is minimized.
Features
Leveraging debt for growth means that loans are invested at higher rates of return than the associated interest charges. Over time, you will pay off the original debt with the investment principal, while pocketing its growth.
Considerations
Mortgage and business loans feature tax-deductible interest, which reduces the costs of these debts even further.
Benefits
Debt financing enhances returns by allowing you to access valuable assets for relatively small initial investments. For example, you pay put down $20,000 on one $180,000 mortgage for a $200,000 home. After one year, the home sells for $220,000 and a $20,000 profit---doubling your initial investment.
Risks
Debt financing increases risks. Assets may fall in value---leaving you with negative equity and loans that must be paid off with other cash flow.
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