To make money out of debt, you need to use your efficient debt responsibly like investing debt in a profitable business, using debt to acquire assets, using debt to acquire skills or education, debt recycling, and paying off inefficient debts with the profits from the above investments, etc.
Using debt to make money might seem like a crazy idea. Because there is a misconception that debts are always bad. However, not all debts are scary.
Moreover, if you can use your efficient debts responsibly then you might as well make some wealth out of it. Well, how to use debt to make money?
That’s what we are going to find out in this article. So, stay tuned.
To use debt to make money, first, we need to understand debt.
According to Investopedia, ‘Debt is something, usually, money, borrowed by one party from another.’ In simpler terms, debt is money you owe to someone or a financial organization. But how can that be good?
Well, have you noticed we are mentioning efficient debt frequently?
Because we can categorize personal debts into two types, Good or efficient debt and bad or inefficient debt. Let’s have a look at the difference between them.
Good Debt Vs. Bad Debt
1. Good Or Efficient Debt
Efficient debt is the type of debt that is used to purchase or acquire assets that can gain value in the long term. For example, if you use your debt to acquire properties, shares, or business then it can be considered good or efficient debt.
2. Bad or Inefficient Debt
Inefficient debts are mostly the type of debts that are used to purchase goods and services and the purchased product does not gain any long-term value. For example, car loans, and credit card debts. These debts often have high-interest rates.
To use debt to make money, you need to utilize your good or efficient debt and get rid of bad debts. But as it is a financial matter so we will talk about the risk associated with debt first.
Risks Of Taking Debt
No matter how good your debt is, there can be some risks if your debt is not utilized properly. Here are some risks associated with taking debt to gain wealth
- Your assets purchased with debt might not always increase in value in the long term. So, there is a slight chance of taking a loss.
- Your losses could exceed the amount of your debt for purchasing the assets.
- Debts come with interests and fees. So, you might need to sell some of your assets or investment sooner than anticipated to pay the fees. As a result, that asset might not bring profit.
- If the interest rate gets high and you have an adjustable-rate mortgage, private loan, or credit card debt then you might need to pay an extra sum in interest fees.
- You might be subject to paying extra tax.
By this time we have understood debt and the risk of taking a debt. Now it’s time to dive into our main objective here.
How Do You Use Debt To Make Money
Here are 5 exclusive ways to make money out of debt
1. Use Low-Interest Debt To Pay Off Inefficient Debt
Inefficient or bad debts are a burden to wealth gain. Because debts with high-interest rates can cripple you. So, the first step to use debt to make money is to get rid of your bad debts.
To pay off bad debts you can take a loan with low-interest rates and more good facilities. This process is also known as Debt-Consolidation.
If you take a new loan to pay off the old high-interest debt, your total debt will rise. However, for the new loan, you are paying much less interest and saving a lot in fees. As a result, your reduced interest payment can help you save a lot of money.
However, if you try Debt-Consolidation then always try to pay off the credit card debt first. Because they have the highest interest rate.
2. Using Debt To Invest In Real State
Most people buy homes or properties with a loan. Because you can repay the home loan for up to 20-30 years. As a result, repayment becomes easier. Moreover, home loans have low-interest rates.
So, you can take a debt to buy a home or apartment and rent it out. Moreover, real states or properties are the types of assets that increase in value over time.
As a result, buying a home or apartment with debt can be beneficial. Because you can repay the debt with rent or even earn a bit and the property will increase its value over time. So, it can increase your wealth.
3. Use Debt To Acquire or Invest In A Business
If you have a great business idea or want to invest in a business with great ROI then taking a loan might be a good idea.
However, you need to find an institution that provides low-interest rate loans with a long repayment system. By this, you can own or get a stake in a business and generate income at the same time.
But there are some risks involved. So, consult with a financial advisor before implementing this.
4. Utilize Debt To Acquire Skills or Education
“The best investment you can
make is in yourself.”
The above quote is true in every aspect. Because when you invest in yourself, you learn more and you can earn more. If you are young, then this can work great for you.
Education or acquiring a skill can be expensive. But the return can be tremendous. Moreover, when you invest in yourself there is little or no chance of failing.
So, taking debt for education or skill is a wise idea. Furthermore, the interest rates of student loans are lower and you don’t need to pay until you can qualify to earn. So, you can utilize or take a loan for education or skill for a side hustle and build wealth out of it.
5. Debt Recycling
Debt recycling is an advanced process where you can recycle your non-tax deductible debts like mortgages with tax-deductible investment debts and generate passive wealth at the same time.
However, it’s an advanced process to use debt to make money and it requires skill in the investment sector. So, without prior knowledge don’t try this. Moreover, if you want to try this then consult with an expert financial advisor.
These are some basic methods to use debt to make money. There are some more ways like investing in shares, hedge funds, Leveraged ETFs, Forex trading, etc. But all of these are advanced methods and this article is for regular Americans. So, we are not discussing it here.
I have already talked about the risk involved to use debt to make money. Now let’s have a look at how you can reduce the risk involved in this process.
Ways To Reduce The Risks Involved In Making Money Using Debt
To reduce the risk involved in using debt to make money need to be debt smart. Here are some ways to be debt smart.
1. Understand How Much Debt You Can Take
To use debt to make money, you must understand how much debt you can manage to take. Because unnecessary debts can cripple your wealth instead of increasing it. So, consult with a financial expert and know how much debt you can afford to take before taking any debt to make money.
2. Understand Every Agreement Related To Your Debt
Before taking any debt always try to understand what comes with it. Read the agreement carefully and check it with a financial advisor before signing it off.
Also, make sure you can afford to pay if the interest rate increases.
3. Always Pay The Due In Time
Most people don’t pay the dues in time. As a result, the dues become so high that they are unable to pay.
So, always try to pay the dues on time. If you face any trouble then talk with your creditor and find a way.
3. Utilize Your Lump Sum
If you get a lump sum like a bonus or inheritance then use it wisely. Use your lump sum to increase the amount you pay off debts, pay extra contributions to your debts or increase the frequency of your debt. Then you can repay your debt early and bring financial security.
4. Save Wisely
We all save a portion of our income in a bank account. But instead of saving it up with a low-interest savings account, keep it in an offset account. Then your mortgage interest rates will be lower.
You can also keep your salary in an offset account to save on interest rates.
5. Consult With An Expert
To reduce the risk associated with your debt always consult with a financial expert before making any financial decision. It might cost you some money but it will save you from most of the risks of taking a debt.
Now, let’s have a look at some FAQs.
At what age should you be debt free?
According to Kevin O’Leary, you should be debt-free before the last quarter of your career and start saving up for retirement. So, your debt-free age should be 40-50 years.
Is it better to be debt free or have savings?
You should do both. For instance, if you have large debts then try to two-thirds of your extra money to pay debts and use the rest for savings.
Should you aim to be debt free?
Yes, you should be. Because a debt-free life means less financial stress and increased financial security.
This is how you can Use Debt To Make Money. If it’s done responsibly then there is a high chance of gaining long-term wealth. But if it’s done poorly then you might end up in more debt.
So, think wisely and consult with a financial expert before making any decision.