Recently across a popular quote about debt and saw a IG post with similar thoughts. The quote was “Rich people don’t have debt.” They couldn’t be further from the truth or maybe they are referring to a different form of “rich”. Anyone that has studied wealth knows that everyone who has been considered rich has/had some form of debt. It’s impossible to achieve wealth without it, unless it is given to you from your parents…which doesn’t really count.

The truth about debt is that it allows you to place your eggs in more than one basket by giving you flexibility and financial freedom. For example, if you only have $100k in savings, you could purchase a single rental property. However, if you get a loan to cover the purchase, it would only require a 20% down payment. The rent income should cover the mortgage, so all you are out of pocket for is the down payment. Here’s the magic part about growing wealth…as property appreciates in value, you’re net worth increases with no additional investment or money from you.

In simple terms, net worth equals total assets less total liabilities. So if that $100k property has increased in value to $110k, then your net worth is as follows: $110k +$80k (remaining savings) – $80k (mortgage loan) = $110k. Doesn’t sound like you’ve won but just think, now you have recurring (profitable) monthly rental income without losing any net worth. And remember, once it is paid off it will be 100% profit. With that $80k in savings available, you can repeat the process. If you had chose the route of not using a loan, it would only allow for the single purchase and thus putting your eggs in one basket.

The thing is you don’t know how each investment will turn out. Property value could appreciate or depreciate, no one knows for certain…it’s all a gamble, so wouldn’t you want to have more chances, more rolls of the dice? So I say that this belief that “Rich people don’t have debt” can be tagged as fake news!

Have you been one that has always avoided debt of any kind? Or have you managed to benefit from the use of it?