Many people are reluctant to take on debt. But not all debts are created equal. When used with a clear plan, certain debts can give you opportunities to build wealth and enhance your financial future.
Unfortunately, debts are often considered a negative measure, and numerous shows and books talk about getting out of debt. True enough, incurring more debt than you can comfortably afford can negatively impact you.
This article will provide some strategic tips to help you build long-term wealth using debts. But first, let’s differentiate what separates good debt from debt and how to use it to create wealth.
Differentiating Good Debt from Bad Debt
Generally, a debt is considered good if it has future value or enables you to accumulate assets that will increase in value. For instance, it’s good debt if you use borrowed money to invest in the future growth of your business.
Meanwhile, bad debt doesn’t provide opportunities to increase your net worth and only deplete your finances. It’s often used to purchase products that depreciate and don’t feature an investment.
Affordability is one critical factor that separates good debt from bad debt. If financial solutions like transfer loans offer favorable interest rates and terms, they can be considered good debts. Online loans are another example, as they can be instrumental in assisting an entrepreneur to kick off their business or survive financial struggles.
Although good debts present lower risk, they can become harmful when not managed responsibly. Taking on debt you can only pay back on time could result in good debt. Managing your debts is a large part of what separates good and bad debts.
5 Strategic Tips to Build Long-Term Wealth Using Debts
Getting your finances in a position to use debts for building wealth over the long term requires precise planning and objectives. Below are a few strategic tips to help you get started.
Secure Low-Cost Capital from Banks
Unless you’re born with inherited wealth, you need a source of capital to make more money. Savings are the most important source of creating capital. They are also the first step for wealth creation.
But if you have valuable assets, you can put them as collateral to secure low-cost capital from banks. You can utilize the borrowed money to invest in more significant assets that will increase in value and generate high returns over time.
Use Personal Loans to Grow Your Business
Taking on a personal loan can also be a valuable source of capital if you’re aspiring to start or grow your business. The advantage of personal loans over other options is you can use them for any purpose.
Since a personal is a lump sum, you can invest it to grow your money. However, ensure that you read the fine print carefully. Some lenders may have restrictions when using the proceeds for certain types of investments like mutual funds, buying stocks, or the same assets.
Invest in Stocks Using Margin Loans
You can borrow against your brokerage account’s securities or equity shares with a margin loan. It further increases your buying power, enabling you to purchase more shares than you would have otherwise been able to afford using only the available cash in your account.
However, buying stocks on margin is not advisable if you’re a beginner investor. If you do, ensure you understand the risks and that the margin loan doesn’t exceed your capacity to pay it back.
Utilize Debt Recycling Strategy
Debt recycling is a financial strategy that replaces non-deductible debt with deductible ones. Non-deductible debts are the money you borrowed for a purpose that doesn’t give you a return. Instead, you pay their interest after paying tax on your income. Typical examples are auto loans, home loans, and credit car payments.
Meanwhile, tax-deductible debts are those for which you can claim a tax deduction. You can use them to invest in income-generating assets like bonds, stocks, or property. Examples of these debts include payments on mortgage interests, charitable deductions, and state and local tax payments.
Eliminate Inefficient Debts
Associated interest and fees on inefficient debts can reduce your wealth. Considering that, sometimes, paying debts that don’t help increase your assets and investments makes more sense.
The main goal of this approach is to lower your overall interest payments in the long run. You can focus on paying down inefficient debts before they start with your highest interest/fee debt.
Leverage Good Debts to Improve Your Financial Future
It’s typical to get uncomfortable when taking on debt. There’s no guarantee that good debts will improve your financial future. Mostly, it depends on choosing what option best suits your situation and how you handle borrowed money wisely.
The key is to only borrow what you can comfortably afford. Remember that every debt carries a specific level of risk. Thus, assess whether you can incur debt as a part of your investment strategy. Don’t hesitate to ask for help from a finance professional.
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