Yes, you read the title correctly, debt might be good for you. Most people (including myself) have been brought up to see debt as a bad thing that must be avoided in its entirety. We have been fed with stories about people who built houses, owned companies and lived large but died without leaving an inheritance because all the properties had been used as collaterals against unpaid loans.
However, debt is not bad in its entirety and the power of debt when properly harnessed can give you the leverage to build wealth that is exponentially greater than what your earning power would naturally dictate. I posit that debt could be likened to fire, which is often regarded as a good slave but a wicked master. This piece seeks to give you three instances in which debt might be good for you.
You Can Use Debt to Create Wealth
The first reason debt is good for you is that it could be a powerful tool for wealth creation. Not many people would have the opportunity to work at a job in which they could earn a massive salary from which they could save up enough money to become wealthy. However, debt can bridge this gap by providing with leverage beyond the scope of what you could normally save from your salary.
Inasmuch as you have a stable source of income or collateral, you can easily leverage your future earnings or equity to raise funds that could be invested in a business. However, if you choose to save up enough money to invest in the business opportunity, other needs could arise for the savings, you might grow weary on the way and the investment opportunity might no longer be viable when you eventually have the money.
However, if you choose to use debt to create wealth, a simple insight to keep in mind is that the return on the investment must be significantly greater than the interest you are required to pay on the loan.
Debt Can Sharpen Your Ability to Seek out the Best ROI
The second reason debt could be good for you is that it could sharpen your ability to seek out the opportunity with the best ROI (Return on Investment) when presented with different investment opportunities. I have already mentioned that when investing borrowed funds, the return on the investment must be significantly greater than the interest you are required to pay on the loan.
For instance, if you are required to pay an interest of 3% per annum on a loan, the investment for which the loan will be used should give you at least a 5% return per annum. However, if you were investing your personal funds, you might blindly invest in a business that will only give you an ROI of 2% per annum but a loan will ensure you search out better opportunities.
Debt Can Put a Roof on Your Head
Many Nigerians don’t fully appreciate the importance of taking home loans or building a house with a mortgage. However, the fact remains owning your house could do wonders for you financial, emotional and psychological health. Hence, instead of waiting until you are able to save up enough money to build/buy a house, taking a home loan or mortgage could be a better and faster alternative that will put a roof on your head.
An important point to note is that if you don’t take a mortgage and own your home, you’ll still be paying a yearly rent to the landlord of your current house. However, when you take a mortgage and you live in your house, you can consider the mortgage payments as the rent you would normally pay to a landlord. The best part is that you’ll stop paying that rent (mortgage) in 10,15, 20 years and the house will be yours completely.
Nonetheless, before you take a home loan or mortgage, you should be relatively young (with at least 15 years of active service ahead of you), you should have a stable income and you should not be planning to relocate from where you intend to build the house.