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Dr. Kalinda Rose Stevenson
Good Debt, Bad Debt
Welcome back!
May I ask a personal question? Are you in debt? And if you are in debt, do you have good debt or bad debt? Do you know the difference?
You might be asking, “How can debt be good debt? Isn’t all debt bad? Wouldn’t it be better to owe nothing to anyone? Isn’t financial independence all about becoming debt free?”
Do you want to know one of the best kept secrets of creating abundance? The secret is, Go into debt.
In the movie, The Matrix, Neo is offered two pills. The blue pill will allow him to maintain the illusion of the matrix. The red pill will show him the truth.
“You take the blue pill and the story ends.
You wake in your bed and you believe
whatever you want to believe.”
“You take the red pill and you stay
in Wonderland, and I show you how
deep the rabbit-hole goes.”
Morpheus, The Matrix
When it comes to debt, each of us is faced with a blue pill or red pill choice. The blue pill will tell you to pay off your debts. Save your money. Invest it in safe investments. The promise of the blue pill is that eventually this strategy will allow you to become debt free and financially independent.
Blue pill advice says, “It is up to you. The only money you will have will come from your own efforts. Scrimp, save, and slowly, slowly, you will begin to build a nest egg.” Blue pill advice is built on the idea that money is scarce, and the only way to get more money is to work for it.
The red pill strategy takes a different route. Instead of paying off your debts, you take on more debt. This red pill strategy flies in the face of what “everyone” knows to be true. Red pill advice says, “Use other people’s money, otherwise known as OPM, to get what you want.”
The truth is that the blue pill strategy is based on the illusion that you have to do it alone. If you follow the blue pill recommendations for getting out of debt and creating financial abundance, you will be limited to the little bit of money that you can earn and save through your own efforts.
Many of the deepest truths I learned about life I learned at Bank Street Beach, on Cape Cod, Massachusetts. As a young child, going to the beach almost every summer day, I took many buckets of water out of the ocean and poured the water in a hole I had dug in the sand. No matter how many buckets of water I took out, I never expected the ocean to run out of water.
It’s the same with money. There are oceans of money available on this planet. You might be deeply in debt. You might not have much money. The fact is, other people have lots of money. And the interesting truth is that many of the other people who have abundant money want to put their money to work making more money.
Put the two realities together. You would like to have more money and the people who have money would like to put their money to work. What do you have? You have the secret of creating wealth. The secret of creating wealth is good debt.
The essential insight is to know that the difference between good debt and bad debt is the difference between spending and investing. Bad debt is spending money on whatever does not create more money. In contrast, good debt allows you to use OPM to create more money. Another word for good debt is leverage. Leverage through good debt is a powerful means to financial abundance.
If you want to buy your plasma TV, you can get credit to buy it and you will repay the money with interest. Borrowing to buy a plasma TV is bad debt, unless you can figure out a way to make money with it. However, show people with money how you will create more money with their money, and you can get other people to invest their money in your efforts. They will charge you interest for the privilege. This is good debt.
About ten years ago, my husband and I had our own red pill, blue pill experiences. We went to see a financial planner to ask about investing. He told us that we had to pay off all our debts and amass a certain amount of money before we could start investing. He offered us a blue pill.
At about the same time, I went to an evening seminar put on by a mortgage broker, who explained how people could buy property with no money of their own. He offered us a red pill.
As a result of taking the red pill, we bought a $284,500 house with absolutely no money of our own. Since we didn’t have enough money for a down payment for a conventional blue pill mortgage, we got 100% financing through private money. Was the interest rate higher than blue pill mortgages? Of course. We paid 9% interest at a time when banks were offering mortgages for much less. The red pill truth is that paying 9% interest allowed us to buy a house we could not have bought with our own money.
We refinanced a year later when property appreciation allowed us to qualify for a conventional mortgage at a lower interest rate.
We recently had the house appraised for a refinance. After ten years, the house is now appraised at $680,000. That means we gained $395,500 without investing any of our own money. As a matter of simple math, the 9% interest we paid for a year resulted in an infinite rate of return for us.
“Perhaps one of the greatest “secrets” of the richest people in the world is summed up in those 3 words: Other People’s Money – OPM for short.”
Matthew Lesko
The essential point of the story is that we dipped into the ocean of abundant money available to us, and took on good debt. By using OPM, we have assets available that we would never have gained by following the blue pill advice of the financial planner.
If you are in debt, I encourage you to take a red pill rather than a blue one. The red pill secret is that you don’t have to do it all alone. When you use OPM to invest, you can create more return on your investment than you can by using your own money. By swallowing the red pill, you will create more money to pay off your bad debts than you will ever be able to make through your own efforts.
Creating your “abundantly alive now!” means knowing the difference between good debt and bad debt. Paying off bad debt is a critical part of creating financial independence. Taking on good debt is one of the most powerful tools you have available for creating abundance.
This article was originally published January 18, 2005.
http://www.abundantlyalivenow.com/archive/AANN-2005-01-18.htm
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