When I was a young man, my rich dad taught me one of life's most valuable financial lessons—the difference between good debt and bad debt. Like most things, debt in and of itself is not bad. It's how you use debt.
My rich dad explained it this way: "Many things can be both good and bad depending on how you use them. For instance, drugs can be good if they're prescribed by a doctor and taken according to direction. They can be bad if you overdose on them. Guns can be good if you understand gun safety and use them for sport or to protect your family. They can be bad if a bad person uses them to commit crimes. And debt can be good if you are financially intelligent and use debt to create cash flow. It can be bad if you're financially unintelligent and use it to acquire liabilities. All things can be good or bad depending on how you use them."
When people say one thing is always bad, they do so either out of fear and ignorance or to take advantage of someone else's fear and ignorance. So, when so-called financial experts tell you that debt is bad, they're appealing to their reader's fear and ignorance—and possibly exposing their own.
Many of these experts know the difference between good debt and bad debt. In fact, they probably use good debt to further their businesses. But they withhold that information from their readers because it's easier—and more profitable—to preach the conventional wisdom of go to school, get a good job, save money, buy a house, and invest in a diversified portfolio of stocks, bonds, and mutual funds.
There is a perceived risk with using debt, and so, rather than educate, many choose to placate—and collect a buck in return. The problem is that the old financial wisdom, the old rules of money, is riskier than ever. Savers are losers and the middle-class is shrinking.
Today, public enemy #1 is fear and ignorance. And that fear and ignorance is manifesting itself in the form of a massive, bad debt crisis. And this massive debt crisis is quickly eroding our position as the global economic superpower.
In an article written for The Wall Street Journal entitled "In China's Orbit," Niall Ferguson writes, "Nothing is more certain to accelerate the shift of global economic power from West to East than the looming U.S. fiscal crisis. With a debt-to-revenue ratio of 312%, Greece is in dire straits already. But the debt-to-revenue ratio of the U.S. is 358%, according to Morgan Stanley. The Congressional Budget Office estimates that interest payments on the federal debt will rise from 9% of federal tax revenues to 20% in 2020, 36% in 2030 and 58% in 2040. Only America's 'exorbitant privilege' of being able to print the world's premier reserve currency gives it breathing space. Yet this very privilege is under mounting attack from the Chinese government."
In plain English, this means life is about to get more expensive. Despite some rose-colored economic news on holiday spending, the US economy is in long-term trouble. As I wrote about in Conspiracy of the Rich: The 8 New Rules of Money, there are four wealth-stealing forces: taxes, debt, inflation, and retirement. All of them are interrelated.
For instance, one of the reasons the US has such a massive debt problem is due to a broken public pension system. In my home state of Arizona, the cost of our public pension system has grown 448 percent over the last ten years to $1.39 billion annually—this despite the fact that the state is facing a $2.25 billion dollar budget deficit. And that's not taking into account the wave of baby boomers that are getting ready to retire. That cost of retirement in Arizona will only grow.
Given the reality of Arizona's budget crisis and its growing retirement burden, the state is faced with two choices: cut benefits or raise taxes. Constitutionally, they can't cut benefits. So, they'll be forced at some point to either change the constitution or to raise taxes. Either move will hurt the middle-class.
As deficits climb in Arizona, there will be cuts in other areas where it is constitutionally allowed such as education, police enforcement, and fire departments. This may cause the state to seek Federal funds to shore up their municipal needs. But the Federal government is facing its own debt crisis. As the Congressional Budget Offices predicts, by 2040, 58 percent of the Federal revenues will go towards simply paying the interest on our debt. How will the Federal government pay its bills and still support a system of states that cannot? They'll raise taxes, of course, but they'll also use the only power they have that the states do not: the printing press. They'll magically print more and more money.
Printing more money will result in inflation, the hidden tax. This means that the American taxpayers will not only pay more in taxes but also see the dollars they've saved lose value, which will weaken their retirement plans, which will cause them to have to take on credit card debt or refinance their homes just to survive, which is private bad debt caused by paying for the government's public bad debt. It's a downward spiral, all stemming from financial ignorance and fear.
The good news is that the wealth stealing forces of taxes, debt, inflation, and retirement can also be valuable tools if you know how to play by the new rules of money. To use these tools effectively, you need to have the antidote to ignorance and fear—knowledge and courage. Successful investors and businesspersons have both in spades.
For instance, through my financial intelligence I know the kinds of investments and businesses I can own to reduce my tax burden to zero, how to use debt to increase my return on investment to infinity, how to invest to hedge against inflation, and to use all of them to produce cash flow that will give me a comfortable retirement. Through my courage, I'm not afraid to make those investments because I trust my financial knowledge and education.
Today, you have a choice. Live in ignorance and fear and suffer the pain that will come from that decision as the debt crisis wipes out the middle-class, or gain financial knowledge and courage and learn to play by the new rules of money. I encourage you to choose the latter.