Good debts have the power to make you rich, bad debts can ruin you

Loans are like a double-edged sword. They can help you financially but they can also ruin you totally on the money front.

We are told from the time we are young that it is a bad idea to be indebted to others for money — that “borrowing” is a bad word and we should try and manage within our means. At one level this is good advice but whether a loan has a positive outcome or a negative one, depends on how well you handle the situation. If you invest correctly, if you put your funds into the right place — by taking a loan — then the loan becomes an asset for you.

Take on debts that are “good debts”

Any time that you take a loan, it will have to be paid back with interest. So plan your finances carefully. Take on debts that are “good debts” and avoid “bad debts”. The good debts have the power to grow your money, if handled and invested properly — this type of loan will make you rich. The bad debts are money down the drain.

When you buy on credit — this is also a type of loan that you are taking — you are deferring payment for your expenses. But if you can’t pay it back in time, you are charged a heavy penalty and this will end up decreasing your funds. If you borrow money, ensure that you can afford to pay it back — if not then do not borrow money.

If money is invested and you are getting a good rate of interest on it, and a loan has a lower rate of interest for repayment, it makes sense for you to stay invested and take a loan for whatever else you need. If you take a loan for investment purposes — like buying a house, land, stocks and shares etc — these are instruments that will make you money in the long run by increasing in value and give you a regular return (rent, dividend etc). As long as your payout is less than your inflow — this type of loan can make your rich.

Loans that will make you poorer

Taking a loan for your daughter’s wedding or to go on an expensive holiday, or to buy your son a high-end luxury car, or to buy capital goods and jewelry that strictly speaking you do not need is not a good idea. These expenses have no returns so your loan here will just make you poorer because you have to pay back what you have borrowed.

There is nothing intrinsically wrong in taking loans — if you can find the right channel for parking the funds that you have borrowed then you will gain from loan you have taken.

If the value of what you using the loan for does not go up and / or does not generate income, then you should definitely not take a loan to buy it. But if you anticipate that it will and you know where and how to invest it, then go ahead and take that loan. And start your efforts at becoming rich.

There is no magic to becoming rich with loans — all that you have to do is manage your loan sensibly so that you can make money from it and increase your net worth.