I recently received an email in response to my piece titled Survive Until You Succeed. Evidently, I have a lot of Dave Ramsey fans who follow me. And for good reason. I usually espouse the evils of accumulating debt and the importance of living below your means. Both of those are Rich Habits – Avoiding Debt and Living Below Your Means.
But I want to clarify something I think is very important. There is Good Debt and there is Bad Debt.
When you have to rely on debt to maintain your standard of living, that is Bad Debt because it means you are living beyond your means. Accumulating any Bad Debt is a Poor Habit.
When you use debt to create and build assets that have the potential of generating a future income stream, that’s Good Debt and that is a Rich Habit. The majority of the self-made millionaires in my study used Good Debt to accumulate their millions. Let me give you some real-life examples:
Depending on your course of study, student loan debt can be good debt. One of the self-made millionaires in my study graduated Rutgers University with a finance degree and $80,000 of debt. He makes $2 mill a year and at the time of the study (2004-2008) he had accumulated about $5 million in investable assets. His goal was to accumulate $10 million and then retire. He did that in 2012 and is still working because he likes his job. He is 41 years old.
Debt to finance a dream can be good debt. in early September of 2008, Musk and all of his companies were on the verge of outright bankruptcy. His Falcon 1 rocket had failed to reach orbit for the third time in early August, 2008. He was running out of money. He had gone through most of his $223 million (PayPal $) plus he had gone through most of the hundreds of millions of dollars venture capitalists and the government had invested in SpaceX and Tesla. Most would have thrown in the towel as a result of the relentless stress Musk was under. But he didn’t quit. He fearlessly kept fighting. Everything hinged on a fourth flight in September, 28 2008. If it too failed, it was over. Only it didn’t fail. The first privately built rocket made orbit. Musk was able to borrow enough money in September of 2008 to get them through the end of December, 2008. On December 28, 2008 NASA awarded SpaceX with a $1.6 billion contract. The rest, as they say is history. Today, Musk is estimated to be worth $10 billion.
Of course, Dream Debt carries with it great risk. Had that September 2008 SpaceX launch failed, Elon Musk’s financial world would have come crashing down on him. It is very likely that he and his companies would have been forced into bankruptcy.
Most of the self-made millionaires in my study relied on Dream Debt in order to fund their dreams. Had it not been for Dream Debt they would not have been able to fund their dreams and their life stories would have been very different.
Asset Accumulation Debt
Debt to acquire income producing assets can be good debt. One of the self-made millionaires in my study has $20 million in debt and $60 million in real estate that kicks off about $1 million a year in cash flow (net income). Their first real estate purchase (1981) was financed almost entirely with debt that carried an 18% interest rate.
Yes, debt can be bad, but not all debt is bad. Bad Debt can make you poor. Good Debt, on the other hand, can make you rich.