How To Leverage Debt To Make Money

Let us talk about how debt can generate income. But before we do that, let us understand 5 concepts that make up financial literacy.

Now that we have a basic understanding of the five words that make up financial literacy, let's talk about debt.

Lets say, you have two types of debt. There is good debt and bad debt. By defining and differentiating the two, you will get a sense that how we think about money is important contribution to one’s well-being.

Lets start with: 1) If you have cash coming in from debt, then that's good debt. If you have cash going out on debt, that's bad debt.

Here is an example:

Suppose you have a rental property and you are getting rental income for that property, and your rental income is more than your expenses. We would say you have positive cash flow. So in our opinion, that's good debt, because that's putting money in your pocket. That's putting cash flow in your pocket.

Let me give you example of bad debt, credit card debt that you took out in order to buy something that does not put money in your pocket. It actually takes money out of your pocket.That's bad debt. So good debt and bad debt has everything to do with cash flow.

Let me ask you this:

Say you take out $30,000 on a credit card at a zero interest rate or a very low transactional rate, let's say, for 18 months, and then you take that money and you invest it in something that creates positive cash flow. Is that good debt or bad debt? GOOD DEBT!

And the reason I say it's good debt is because it's putting money in your pocket. So if you have a rental property, you will have positive cash flow. And from Robert Kawasaki’s opinion, that's good debt, because that's putting money in your pocket.

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Some other things that are typically considered bad debt would be student loans, car loans, and believe it or not, your home. Why? Because typically these things take money out of your pocket if you are a not using them for business. They typically don't put money in your pocket on a monthly basis if you are using them for the yourself or your family. The business side of these typically bad debt examples though can make great cash flow businesses (something I am passionate about). There are a lot of people who buy items for business like 1) cars, 2) houses, and 3) other equipment to generate cash flow.

So in that case, a car loan would actually be good debt. Why? Because it generates positive cash flow. Back to what we said earlier: the only difference between good debt and bad debt is the cash flow that it creates. So let's think a little bit about how you can take debt and turn it into income.

Back to an example we used earlier when it comes to real estate, the way we turn debt into income. If you bought real estate, single family homes, and put a tenant in that home. The tenant paid you rental income greater than your expenses, and when you talk about expenses, you might be talking about the normal expenses associated with real estate, property taxes, insurance, repair and maintenance, but keep in mind that the rental property also paid for the debt, and the net result will inevitable be a positive cash flow.

So that's how you can use a loan which created debt, and generate positive cash flow. That, in our opinion, is good debt.

If I would have bought a piece of real estate and I couldn't find a tenant to put in that piece of real estate, and I wasn't generating any rental income, or I was generating rental income that was less than my expenses that would have produced a negative cash flow, and in that situation, it would be considered bad debt. Once again, good debt is cash flow coming in your pocket. Bad debt is cash flow leaving your pocket!

Taking on debt in order to build your net worth are the things that want you to think about in relation to leverage. We are not the type of family who believe all debt is bad, though we know there are some people out there that do believe that. If you leverage debt correctly, it can grow your wealth.

You can leverage credit card debt, real estate debt, unsecured debt, or any type of debt to create positive cash flow. We are not advocating you go out and create debt without speaking with a Financial Advisor. You really need to understand leverage! So keep coming back here for more leverage tips!