In general, I accept the consequences of accumulating debt and highlight the importance of living below your means. Both are common habits among millionaires; avoid debt and live below your means.
However, I want to make something clear that I consider very important. There is good debt and bad debt.
Also read: 13 habits of poverty that you are teaching your children without realizing it.
Difference between good debt and bad debt.
What is bad debt?
When you need to go into debt to maintain your lifestyle, that’s bad debt, as it means you’re living beyond your means. Accumulating this type of debt is definitely a habit of poor people.
What is good debt?
When you use debt as a method to create and build assets that have the potential to generate income, we are talking about good debt, a habit of the rich. Most of the millionaires in my study used and use good debt to continue accumulating wealth. Let me give you some examples.
3 Examples of good debt.
1. The debt of the University.
Depending on your line of study, a loan to pay for college may be good debt. One of the millionaires analyzed in my study is a graduate of Rutgers University. He has a degree in finance incurred $80,000 in debt. He was generating 2 million a year at the time the study was conducted (2004-2008) accumulating 5 million in assets. His goal was to accumulate 10 and fold. He achieved that goal in 2012 and continues to work because he loves his work. He is currently 41.
Also read: How to get out of debt and transform it into a 20 million dollar business.
2. The debt of your dreams.
Going into debt to finance a dream can be good debt. At the beginning of September 2008, Elon Musk and all his companies were on the brink of the abyss, very close to entering bankruptcy.
His Falcon One rocket had missed the goal of reaching orbit for the third time. Musk was running out of money, having used almost all of the money he had made from the PayPal sale ($223 million), plus hundreds of millions of dollars he had raised through investors and government loans, money he had invested in SpaceX and Tesla.
Most would have given up at that level. Nonetheless, Musk continued to fight. Everything depended on a fourth flight in September 2008, if it failed, all was lost.
But it did not fail, the first private rocket had reached orbit. Musk was able to come up with more money to make it to the end of the year. On December 28, NASA awarded SpaceX with a $1.6 billion contract. The rest is history and Musk has an estimated fortune of 219 billion (August 2022).
Also read: How to avoid having debts? Use the magic number technique.
Of course, going into debt to finance a dream has a great risk. If the fourth pitch hadn’t been successful, all of Musk’s debts would have fallen on top of him, forcing him to declare all of his companies bankrupt.
Most of the millionaires in my study relied on loans to finance their dreams. Otherwise, they would not have achieved their dreams and their life stories would be different.
Also read: He bet on impossible ideas and today he is one of the richest men in the world.
3. Accumulation of debt assets.
Debt to acquire assets that generate income is good debt. One of the millionaires in my study has $20 million in debt and $60 million invested in property that brings him approximately $1 million in net income. The first property he bought was acquired in 1981 almost entirely through debt and with 18% interest.
Yes, debt can be bad, but it’s not always the case. Bad debt can make you poor, but good debt can make you a millionaire.
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