Debt Can Make You Rich, If You Know How to Use It

“How do you get rich? Easy. Borrow money, then buy assets.” Sounds simple, right? But hold on. There’s a catch. “Poor people borrow money too, but they buy liabilities instead.” And that’s where the problem lies.

Imagine two friends living in America. Let’s call them Mike and Dave. Both borrow $20,000. Mike buys a small property to rent out, while Dave buys a shiny new car to impress his friends. The result? Mike earns an extra $500 a month from rental income. Dave? He’s stuck with service bills, gas costs, and insurance premiums that drain his wallet.

What’s the Difference Between Assets and Liabilities?

Think of assets as your loyal friends: they put money in your pocket. Liabilities? They’re the toxic ones: they look good on the surface but drain your resources. Assets can be rental properties, stocks, small businesses, or even a massage chair at the mall (yes, that’s an asset!). Liabilities? Fancy cars, branded handbags, or the latest gadgets that rack up credit card debt.

What about a home? That’s tricky. If the house just sits there without generating income, it’s closer to a liability. But rent out a spare room on Airbnb, and suddenly, it’s an asset.

The Wealthy and Their Debt Tricks

The wealthy aren’t afraid of debt. Not because they’re reckless, but because they know how to use debt to make more money. It’s called leverage. With leverage, they can buy something big without full upfront capital and still reap maximum returns.

Here’s a simple example: a property in New York costs $500,000. Instead of paying cash, a wealthy individual might borrow $400,000 and put down $100,000 of their own money. They rent it out for $3,000 a month. After paying the $2,500 mortgage, they’re left with $500 in profit. If the property’s value rises to $600,000, they’ve turned a $100,000 investment into a $200,000 gain. That’s the power of leverage.

But leverage can backfire if misused. For example, if the property doesn’t rent out or interest rates spike. Think of leverage like riding a bike: don’t go too fast if you can’t maintain balance.

Common Mistakes That Drain Wallets

Many people borrow money not for investments but for things that look good but have no long-term value. Buying a sports car for weekend trips to Vegas while skipping retirement savings, or splurging on the latest gadget just to post on Instagram, often leads to mounting credit card debt.

Some might argue, “But you only live once. Can’t I enjoy life?” Sure, you can. But if your entire paycheck is spent on lifestyle expenses, who’s going to enjoy your retirement? Bills?

Interesting Fact

According to a Federal Reserve survey, about 40% of Americans don’t have $400 for an emergency. Learning to distinguish between assets and liabilities could be the key to avoiding this situation.

Mini Case Study

Sarah started small by buying a used vending machine for $1,500 with a small loan. The machine generated $300 a month. Within six months, she paid off the loan, and the rest became pure profit. This simple example shows how small assets can create a significant impact.

Steps to Change Your Mindset

1. Identify Assets and Liabilities: Before buying something, ask one simple question: “Will this put money into or take money out of my pocket?” If it’s the latter, think twice.
2. Start Small: You don’t have to buy a large property right away. Start with stocks, bonds, or a small business. Many apps in the U.S., like Robinhood, Mint, or Acorns, make investing as easy as online shopping.
3. Learn About Leverage: Debt isn’t your enemy if used wisely. But don’t borrow recklessly. Understand the risks and rewards first.
4. Prioritize Financial Education: Often, the issue isn’t a lack of money but a lack of knowledge. Plenty of free online resources can help.

Humor to Keep It Light

Liabilities are like treadmills bought at the start of the year: meant for exercise but end up as an expensive clothes hanger. Assets, on the other hand, are like a coffee machine that keeps brewing delicious coffee every morning without complaint.

Simple Illustration

Think of assets as egg-laying hens: once bought, they keep giving you eggs daily. Liabilities? They’re like roasted chicken: tasty for one meal but gone in a single sitting.

A Thought-Provoking Conclusion

Rich and poor people both have 24 hours a day, but the way they manage money sets them apart. Debt isn’t the problem; it’s how it’s used that matters. Mike and Dave are simple examples. One uses money as a tool; the other, as a burden. The choice is yours: be like Mike, whose investments grow, or Dave, who’s perpetually chasing bills.

Try a one-week challenge: record all your expenses and mark which are assets or liabilities. See how your spending habits can transform into steps toward financial freedom. So, the next time you swipe your credit card for a new bag or car upgrade, ask yourself first: “Is this an asset or a liability?” If it’s the latter, maybe it’s time to learn from Mike.

“Managing finances or navigating life is like playing a video game: there are easy levels, tough bosses, but the key is to keep playing with a strategy. Just like building assets, success in life requires focus, courage to face challenges, and persistence to keep trying.”

Speaking of money, it’s hard not to think of the song Mo Money Mo Problems by The Notorious B.I.G. This classic reflects the other side of wealth and lifestyle, highlighting liabilities often mistaken for assets.

And the movie The Big Short (2015) illustrates how poorly managed leverage can crash economies but also shows how individuals who understand finances can seize opportunities in crises. Perfect for a financial evaluation binge!