Did you know there are different types of debt?
Even though traditionally we only think about the bad implications of debt, the truth is that it is possible to use debt as one of your wealth-building strategies.
Get ready to learn everything about debt, how you can use debt to build wealth, and how to achieve financial freedom.
Let’s get started!
What is Debt?
Generally speaking, debt is money lent from one party, called the debtor, to another, called the creditor. Debt can be of any amount and is typically documented by a contract or promissory note. You can borrow money from a bank, credit union, or other lender with the agreement to repay the loan with interest over a certain period of time.
Using a credit card to finance something you need and paying off the balance over time is one of America’s most common types of credit. Another way people take out a loan is from a family member or a friend.
Debt typically involves contractual obligations regarding the repayment schedule for both the principal amount and interest. Either collateral or no assets are necessary to secure it.
Understanding the Good Debt
Good debt, or “efficient debt”, is considered to be any debt used to purchase assets that will increase in value over time and help you make more money. Capital growth and income generated from these assets are an amazing way to pay back that good debt. Some examples of good debt include student loans, business loans, investment loans, and mortgages.
Borrowed money for an education or a business will increase in value over time and can be used to pay back the debt plus make a profit. Still, you must be careful.
Even though these investments can help you build wealth, you must choose carefully what you will do with your money. Starting a business can be a make-or-break decision for your finances; the results will depend on whether you choose the right type of business or not.
By extending the repayment period, good debt can assist individuals in effectively managing their finances. It can also aid them in creating a positive credit history, resulting in more advantageous rates and terms for future loans. When individuals borrow money wisely, they can boost their credit scores, leading to various financial opportunities.
However, it is critical to handle good debt prudently and be cautious of the loan amount, terms, and interest. Individuals should only acquire debt that they can manage comfortably, supporting them in accomplishing their financial goals.
If it doesn’t seem like something you can do, it is totally okay to first pay off your debt and then start generating cash flow and building wealth. The best way to erase your debt is to start with your highest interest or fee debt and progressively pay that off. For example, if the interest on your credit card balance or personal loan is higher than the interest on your home loan, it would be better to pay those first.
Personal Loans
Personal loan debt is considered good if it helps you improve your future financial situation and meet your goals. If you repay your personal loan on time and without missing any payments, getting one can help you improve your credit.
Still, personal loan debt can be considered bad if you can’t afford to make monthly payments or if it depletes your finances and serves no purpose.
Understanding the Bad Debt
Bad debt is any debt a person or business cannot pay off. Other terms to describe this type of debt are “non-performing loan,” “inefficient debt,” and “uncollectible debt.” Bad debt typically results from a debtor being unable to pay back a loan or other financial obligation because they are unable or unwilling to do so.
Some examples of bad debt include consumer debt, non-appreciating items, speculative loans, car loans, and margin loans.
The reason for having a bad debt can often be the result of a debtor’s bad decision. But that’s not the only reason; sometimes it is due to circumstances out of the debtor’s control.
The consequences of bad debt can be terrible, especially for business owners. Bad debts reduce a company’s income and profits, weakening its financial stability. On top of that, bad debt can impact a company’s creditworthiness, making it more difficult to get loans or financing in the future.
Bad debts aren’t beneficial for individuals either. These types of debts can harm an individual’s credit score, making it really difficult to obtain credit cards, loans, and other forms of financing. And besides the financial effects, bad debts greatly impact people’s stress levels and anxiety.
Margin Loans
One of the most common type of “bad debt” is a margin loan, which is money borrowed against the value of the person’s current investments. Still, the outcome of this loan will depend on your circumstances and risk tolerance.
A margin account is a type of brokerage account that allows you to borrow a maximum of 50% of the purchase price from the stock market. This means your $50,000 investment strategy can give you $100,000 worth of buying power, which you can use to buy stocks. So, good results are possible, but they are too risky and complicated for someone who isn’t a professional.
3 Different Ways of Using Personal Loan Debt for Wealth Building
We’ve prepared three ways to use your personal loan debt to build wealth.
#3 Real Estate
Personal loan debt can be utilized strategically to invest in real estate. By obtaining a personal loan, you can access the necessary funds to make a down payment on a property or cover renovation costs. This enables you to enter the real estate market and potentially benefit from property appreciation and rental income.
Real estate allows you to leverage your capital by multiples of twenty with 5% down payments or multiples of one thousand with monthly payments. On top of that, if you responsibly manage personal loan debt and make timely payments, you can establish a positive credit history, leading to better financing options and lower interest rates in the future. You can leverage real estate investments to generate long-term wealth through careful financial planning, research, and leveraging personal loan debt wisely. This investment strategy showed results for many real estate investors.
#2 Start a Business
Personal loan debt can be a valuable resource for individuals aspiring to start a business and achieve financial independence. By acquiring a personal loan, you can secure the necessary capital to cover startup costs, purchase equipment, or fund marketing campaigns.
This injection of funds enables you to establish and grow your business ventures. With diligent planning, a strategic allocation of funds, and a strong business plan, it’s possible to leverage personal loan debt to fuel their entrepreneurial ambitions. Successful business growth can lead to increased profitability, expansion, and ultimately wealth accumulation.
#1 Buy Whole Life Insurance Policy
Buying a whole life insurance policy is the best way to invest in your future, whether through personal loan debt or otherwise.
Are you familiar with this type of life insurance policy?
A whole life insurance policy is a type of permanent life insurance policy, which means you only buy your insurance coverage once and are covered as long as you’re paying premiums, i.e., your entire life. But that’s not all.
A whole life insurance policy has a cash value component, which makes it perfect for building wealth if set up correctly and used wisely.
How is it possible to build wealth using whole life insurance?
A portion of every monthly payment you make goes towards building this cash value, which grows on a tax-deferred basis. You can borrow money from your policy and use it for anything you need.
The most important note here is that policy loans are nothing like traditional bank loans. With policy loans, you have complete control over the terms and money.
Traditional bank loans usually have high-interest rates and specific repayment terms, including a set repayment schedule and a fixed period over which the loan must be repaid. Policy loans, on the other hand, offer more flexibility. You have a choice between paying off the loan in accordance with the insurance company’s set schedule or on your own terms.
The interest rate on traditional bank loans can vary depending on factors like your credit score, the loan type, and prevailing market rates. These rates may be fixed or variable. The insurance company determines the interest rate for a policy loan, which is significantly lower than other loan options. On top of that, in contrast to bank loans, policy loans offer many tax benefits.
The process of borrowing money through policy loans and paying them off is called the personal banking system. You’re basically imitating traditional banking, but with one impeccable difference—you’re paying yourself and keeping the interest, not financial institutions.
How do we know all about this?
We used this method to go from $120k in debt to FINANCIALLY FREE.
How We Went from ZERO to HERO
Let us get this clear—this is not an easy journey. If you really want to achieve financial freedom and build wealth, you will need the right mindset, discipline, and execution.
We didn’t make a radical change in our lives, we just made small tweaks and adjustments. Our mindset started to change how we wanted to direct our money.
After discovering that $2k of our money goes to interest payments, we knew that we wanted to stop throwing away money like that and make those payments come back to us. We researched the ways in which we could make that happen, and we came across a dividend-paying whole life insurance policy.
This discovery didn’t solve our problem, but it did magnify it. The reason is that if we had kept those same habits of using our credit cards and our insurance policy, we would have built that system.
Once you start asking questions and looking for financial help, you can become strategic about how you can build wealth in addition to paying off debts. Once we understood these creative financing ways to further our efforts, we recognized that $2k could come back to us with all the principal and interest, allowing us to do way more than what we were doing before.
Final Thoughts
Nearly half of Americans are in debt. The enormous problem is that no one teaches us how to erase debt and use our finances in our favor.
Even though debt has negative connotations, if the borrowed money is used wisely and creatively, there is a high chance that you can use your debt to build wealth. Still, it’s important to keep in mind the difference between good debt and bad debt and ask yourself about your goals and wishes.
One of the ways you can use your personal loan to improve your finances in the future is by buying a whole life insurance policy and setting up your personal banking system.
But there is also another way to buy a whole life policy.
Join Our Pay Yourself First Challenge
We know how hard it is to save money to buy a whole life insurance policy. That’s why we created this challenge to help you save your first $500 in just four weeks and learn the foundations of saving necessary for starting your own personal banking system. With your personal banking system, it will be possible to start growing wealth and building financial security.
In this challenge, you will get all the essential insights about the right mindset and discipline. You don’t have to be in more debt to buy your whole life policy. Just join our Pay Yourself First challenge, and we will help you reach your goals!