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How Debt Can Actually Be A Good Thing

Article writer - David Saba image

Debt is just an amount that you owe someone else - whether it makes your life blossom or turn sour entirely depends on how wisely you invest that amount.

There is no escaping debt in the capitalist jungle that we currently live in. A deeper analysis of modern money mechanics reveal that the whole world is virtually in debt. Complex things aside, debt might not completely be a bad thing at all. Debt is just an amount that you owe someone else - whether it makes your life blossom or turn sour entirely depends on how wisely you invest that amount.

Understanding Debt

When armed with cash, investment opportunities galore! Good investments return good profits. Take college education for example, an investment in education will certainly promise you a rewarding career. Debt much? A couple of years into your new job and you would have cleared every single penny.

The same can be said about starting a small business. You may have to rely on angel investors or financiers for the capital - which essentially is debt. But when your idea clicks, when those cash registers run, it is a very successful investment.

However, your fall from grace is rather imminent when you borrow cash for something that does not really grow in value. That car you bought last week for $80,000 is actually worth a whole lot less now. Plus, the interest you'd pay for the principal amount is a huge waste of money. In essence, you are paying $140,000 for a $80,000 car, that is going to be worth $40,000 in a year's time. That is bad debt.

Bad debt also includes personal loans, clothes or other perishable goods. These kind of possessions do not really hold value and might only serve as temporary entertainment. That $1000 Louis Vuitton backpack might grab a few eyeballs now but it will be a thing of the past soon, but your debt will haunt you for a good while.

Lastly, let's not forget about credit cards. Credit cards give you the license to buy pretty much anything. Most people often forget the ridiculous interest rates and splurge only to repent later on. Having a balance on your credit card is probably the last thing you would want to do.

Making Good Use Of Debt

Real estate investors are a little more familiar with these kind of situations. Their strategy is simple - buy a house, live in it for a few years, watch market prices go sky high, then sell it for a huge profit.

To put things into an easier perspective, let us put an hypothetical example forward.

Let's assume that you have 100,000 dollars in hand. You could find an investment property and rent it out for a 1000 dollars a month. This would ensure a return of about 12000 dollars on an annual basis. Sounds simple enough. But here's a smarter way to weasel out more money.  

If you choose to borrow 80% of 5 different properties that cost the same amount ($100,000), your return would directly jump to 60% since you invested only $20,000 for the same. You would obviously have to pay your loans, but since since you have increased your return on investment, nothing else matters anymore.

All That Glitters Is Not Gold

Okay, so all this sounds great. You might even venture into borrowing money purely for the sake of making money now, but tragically, you could also face various dangers for the potential peril of losing a lot of cash and end up being required to remunerate your brokers (if you choose to have one), or other parties involved during the exchange process.

Make no mistake, debt can do good to you if you've set up your plans and objectives smartly. But even the most smartest and cunning venture needs care and caution. Like all investments, everything is subject to market fluctuations and other factors. You better back yourself with some help before you borrow huge sums of cash.

Conclusion

The sad part of life is that most of us will never truly be able to pay cash for everything that we would end up buying. Having said that, we can always make smarter choices. We are bound to take loans, but it all comes down to the kind of investments that we choose to make. If you are on shaky grounds, it would also be wise to wait it out before you apply for a loan.

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