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Debt of Gratitude

Debt of Gratitude

When I was growing up, my poor dad said, “Debt is bad.” He spent most of his life avoiding debt, taking it on only in emergencies. “That’s what credit cards are for,” he said. He also worked hard to pay off his mortgage and saved money to buy things cash whenever possible.

My rich dad, agreed with my poor dad—to a point. “Some debt is bad,” my rich dad said. “But some debt is good too,” he added. To my rich dad, taking on debt only in emergencies was the worst debt of all.

He believed taking on debt in emergencies was a sign of poor financial intelligence. It showed that you were living paycheck to paycheck, which meant you probably didn’t have many assets and probably had many liabilities.

My rich dad also believed it was good to only buy liabilities like cars, televisions, and more with cash rather than financing them. He agreed debt was bad when used for luxury items that lost value over time. But he differed from my poor dad because he believed in using good debt to create cash for those things and more, while my poor dad believed in saving and spending.

My poor dad would save money and then spend it. My rich dad would borrow money that made money for him to spend many times over.

Though I didn’t know it at the time, my rich dad was teaching me a fundamental lesson that the rich know about money—debt can make you richer, if it’s good debt.

Good Debt vs. Bad Debt

Today, many people are living by the old rules of money, the rules of the poor and the middle class. Facing uncertainty, people are saving money, sitting on piles of cash hoping things will settle down. The problem with this strategy is that savers are losers because as the Fed prints record amounts of money—the base money supply has risen three times over since 2008—savings lose value, especially as inflation kicks in and grows faster than the interest paid on savings.

Others, the financially intelligent, are making a lot of money and borrowing more of it. Why? Interest rates are at the lowest in history and many assets are priced at bargain bin prices.

The financially intelligent understand they can borrow money at cheap interest rates and use that money to buy assets that provide cash flow that covers their debt payment and expenses while putting money in their pocket every month.

Both individual investors and large companies are growing their good debt as I write. As The Wall Street Journal reports, “Banks have lent $66.6 billion this year in five-year U.S. corporate investment-grade loans, some of the longest available, almost 25 times the amount for the same time last year, according to Dealogic. Investment-grade loans to U.S. companies have more than doubled so far this year compared to the same period in 2010. Junk-rated companies have also been able to raise debt at a record pace.”

Translation: Money is cheap so companies are stocking up on it.

The power of good debt

My simple definition of good debt is debt that puts money into your pocket rather than takes money out. For instance, if I’m using debt for a business deal, I won’t do the deal unless the cash flow from the deal pays for my debt payment and expenses while providing a good return.

This assures that cash comes into my pocket each month, providing a continual income that allows me to enjoy liabilities.

The great thing about debt is it allows me to leverage my existing cash into many assets.

For example, in real estate, I can buy investment properties with debt. The bank will give me a loan for 80 percent of the purchase price while I only have to use my money—or someone else’s—for 20 percent of the purchase price. My job is to find a deal that pays the bank the interest on the 80 percent while still providing a decent return on my 20 percent.

So, using simple math, if I have $100,000 in cash, I could buy one property for $100,000 that gives off $800 a month in cash flow—a little over 9 percent annual return.

Or I could use good debt to buy five $100,000 properties. The bank would lend me $80,000 for each property and I would divide my $100,000 into five $20,000 down payments. At 5 percent interest, the payment on the loans would be around $500. So, my cash flow on each property would be $300 a month ($800 in rent – $500 in debt payment = $300 per month) for a total of $1,500 ($300 x 5 = $1,500) per month—an 18 percent annual return.

I can then use the income from my properties to either invest in more assets or I can buy something nice for myself or for Kim knowing that more cash will come next month from my investments. Rather than save and spend like my poor dad, I invest and spend like my rich dad.

That’s the power of good debt. And for that lesson, I owe my rich dad a debt of gratitude.

Leave A Comment jump to leave a comment
Igor
5/24/2011 11:34:36 PM
I read this example about 100 times in diferent Robert books and articles. There is one problem in it. If people can pay 500 for loan every month, they doesn't want to pay 800 for a rent. They are not stupid, they will pay for the same property max 500.
Steven
Saturday, June 11, 2011
hi, what happens is that not everybody has a clean financial record to get an 80k loan, so thats when you take the advantage and get your self the good debt. besides that, not everybody is willing to buy or invest this days because "they only see "depression", and real state market "going down" so they preffer to rent for 800$ rather than paying 500$ for a house they think its going to reduce its value somewhat 20% about in a year, the way they may see it is that next year the house will cost lets say 80k not 100k or more, so they would be "losing money". the only way many people will be buying houses again would be when they read on the news that real states are going up again. thats the regular way of thinking, last sunday i argued with a friend of mine, he studies something like economy, and he told me i was the only person willing to invest in real state in the US, that nobody else in the world besides me would do it. im just happy to know the things i know.
James
Friday, June 17, 2011
Actually, you couldnt be MORE incorrect. If no one would pay more in rent than they would for a mortgage payment, then why and how are there so many apartment complexes and residential rentals? I can GUARANTEE that investors dont buy or build these properties to lose money! I know that I don't. So if it doesn't work that way, then why does it work?!? The only people that usually "know" why things won't work are the ones that either can't or won't do it, or failed once and gave up. So, the question is, which one are you Igor?
Robert
5/25/2011 4:26:33 AM
Interesting article Mr. Kiyosaki. I've read many of your books and have read quite a few of your articles on yahoo finance. I've even been to a few of the Rich Dad Seminars in the Little Rock area. I realize that you haven't posted on yahoo since October of 2010 and decided to check out your website for more recent articles. I wanted to ask you personally if you see an upcoming bubble in education, as in college? Having just recently graduated I see college in two ways; I see it as a place to learn and as a business. Knowing that many students get deeply in debt for the sake of a better life they rush to fill out credit applications to fund their education and living expenses. They way I see it, it seems as if most colleges pay their teachers with funny money? Meaning once the student assumes the debt the school gets paid. Knowing that the current job market in the U.S. isn't actually at its greatest, does it make sense to assume such debt? Especially knowing that at the bigger schools coaches get paid 10,20, or 30 million dollars! It seems as if most schools have lost focus of what going to college is all about and their more worried about winning championships, supporting the all mighty logo of the school. Correct me if I'm wrong, but is that why school debt is not forgivin in a bankruptcy, because it would cause a secondary crash in an area of the economy? Plus, if the jobs just aren't there, why get into such debt to go to school. It seems as if a lot of schools are floating on a bunch of hot air. I just don't think the economy has gotten bad enough for most students to realize it. But what they do realize is that tuition prices keep going up! After reading many of your books you've opened up my eyes to the real world. After serving in the Army for 8 years and using my GI Bill to fund my education I realize that their are so many students getting deeply into debt, in the name of education and most of the people take a whole lot more than they need. Robert O.
Neil
Wednesday, May 25, 2011
That is an interesting perspective on formal education as a bubble! There is no doubt they are trying to make more and more money of the backs of their students and teaching them less and less about finances (real money). Great time to make money, although, i'm not sure what it all says about humanity. Thanks for the comment.
Alexandr
Tuesday, May 31, 2011
Приветствую Роберт. Мне очень нравятся ваши книги, я очень многое почерпнул в них. Хотелось бы, чтобы ваш сайт был доступен на русском языке. Спасибо большое. Советую вам прочитать Книги Джона Максвелла вы чем то похожи с ним.Удачи во всем.
meli
Wednesday, June 08, 2011
Greetings Robert. I really like your books, I really learned a lot from them. I would like to have your site available in Russian. Thank you very much. I suggest you read the book by John Maxwell you than the similarity to nim.Udachi around. translation from the Russian to English using Googles translator. Ive found the tool useful to talk to others on this site since its glogal. ~Meli BC
Robert
5/25/2011 4:27:29 AM
Oh, by the way I forgot to ask you if I could get some feedback on my comment. Thank you.
yinka
Wednesday, May 25, 2011
mr. kiyosaki,pls do not be embarrassed with this.from the bottom of my heart, i do wish 2 send u money,even if not more than $10, kindly accept it as it is so little.sorry that am postin it publicly,i just dont know how else am to reach u.pls how do i send this money to u?am very serious,pls treat as such.i owe u alot than that
Ben
Wednesday, June 01, 2011
Dear Robert Great post. I think Robert K wrote about this briefly in one of his books, that he beleived it might be hard to justify the huge prices charged for College education in USA, huge campuses, lots staff, high running costs, etc etc. When lots of education can be delivered efficiently and cheaply via Internet (e.g. Webinars), face to face still has it's value but could be less than the traditional 9months/year and still develiver quality education. It's still a debate. I beleive Robert K has a massive point and you have showed how the economics are for individuals. This will play out in future years. There will still be a place for on site college of course but will have to be redefined for many except the well endowed. In Australia there have been many newspaper articles in the past on Unis apparently pushing behind the scenes to pass students from overseas who are paying full fees, and there has been talk of decreased standards. I did 2 subjects (half time for half a year externally) in a post grad diploma from a very reputable uni there 3 years ago and I didnt beleive the standard was rigorous at all. i scored credit and distinction and compared to my oriniginal degree in 1980s should have scored pass/credit at most. In my field looking at Uni faculties in Oz and even Uk many faculties have few staff with field experience. What struck a cord with me, my friends from UK/Australia with extensive field experience but only say Masters degrees have a snowball's chance of scoring a job in Uk/Aust. I am still pondering why. If I was running a faculty I would want them part time to blast the competition out of the water with the most pragmatic components taught at Uni. So I think College/uni education is open to be redefined as who were your teachers/faculty, and how rigorous was the education - regardless of whether delivered on line or not. You are ahead of the curve. Look for that black swan.
yinka
5/25/2011 8:55:21 AM
mr. kiyosaki,pls do not be embarrassed with this.from the bottom of my heart, i do wish 2 send u money,even if not more than $10, kindly accept it as it is so little.sorry that am postin it publicly,i just dont know how else am to reach u.pls how do i send this money to u?am very serious,pls treat as such.i owe u alot than that
yinka
5/25/2011 9:03:10 AM
our banks here ask for nothing less than 17% interest rate on loan.hw can u make a gud debt out of that?
cashflow3000
Monday, May 30, 2011
yinka. get ahold of cashflow 101 board game and play it a few times. the interest rate on the bank loan is comparable to 120% (!) interest and clearly demonstrates how you can use money even at that high of a rate to generate positive returns. good luck!
yinka
Friday, June 03, 2011
Thanks for takin ur time to answer me.i wanted that game for myself badly but i cant currently afford the $195 am seein on it.but if u av a used one u want to fling for a lower price,i won't mind purchasing.that's if it's legal to do so anyway.
yinka
5/25/2011 9:08:36 AM
please, can sum1 explain d meanin of bubble?i 4got 2 include it in my last comment.sorry 4 bombardin the forum
arafeel
5/25/2011 1:27:55 PM
hello this is ara(da joung) from Korea. Recently I read your book. wow! wow! wow! I'm impressed. I continue to read your book. I want to play Cash Flow game. but i can not do it. because Korea stopped making a Cash Flow game. i am so so sad. Why stop?? i want to play Cash Flow game!!!!! Please re-created the game in Korea. If you had a problem with Last Importer. let's dea with me!!! Korea people want to your game!!!! thank you~!l love ara
arafeel
5/25/2011 1:28:50 PM
hello this is ara(da joung) from Korea. Recently I read your book. wow! wow! wow! I'm impressed. I continue to read your book. I want to play Cash Flow game. but i can not do it. because Korea stopped making a Cash Flow game. i am so so sad. Why stop?? i want to play Cash Flow game!!!!! Please re-created the game in Korea. If you had a problem with Last Importer. let's dea with me!!! Korea people want to your game!!!! thank you~!l love ara
jane
5/26/2011 9:55:19 AM
Hi Robert, Do you always shoot for loaning 20%? Sometimes the payment ends up nmore than the income, like in garage rentals. Thanks
yinka
5/27/2011 6:40:18 AM
am expectin the reply please
Tim @ attractionmarketinginsider.com
Friday, May 27, 2011
Some interesting comments here. That is unfortunate Korea has stopped producing the cashflow game. I intend to get my children playing this game soon, I never had an education in such things and this would have been incredibly valuable.
Albert
5/28/2011 3:27:45 PM
Hi Robert, I'm really inspired by you. But I have a few questions. You said that with 5% interest on the loan you would be paying $500 a month, how did you come to this number? My calculation is as follows: An $80000 loan with a 5% fixed rate interest would give you $4000 to pay annually, that means $333 monthly, so if you have 5 apartments that generate $800 per month that would mean your total month income is 5*(800-333)=$2335, which is a 28% annual return. If my concept is wrong please let me know! Because I'm a little confused. I'm really interested in this too! THANKS!
cashflow3000
Monday, May 30, 2011
Hey Albert. Your calculations are correct. The part you are missing is the Principle on the mortgage and also the property Taxes and the Insurance. These four things together are called PITI (Principle, Interest, Taxes, Insurance) and is most likely where RK is coming up with his $500 amount. You might find it helpful to play with mortgage calculators such as those found on bankrate.com and other sites. The one I used on bankrate shows a payment of $429.46 based on a 30 year loan at 5%. That would be the PI, and with some rounding you could figure the $500 would cover taxes and insurance. I suspect RK was using "round" numbers to keep the example simple. Great question keep on thinking!
Victoria
Sunday, June 05, 2011
Hello everybody. A great article! As far as I understand $500 include: -5% bank interests, -principles, -insurance, -taxes. And what about the loan of $800,000 itself? Shall me pay it back as well? How will it influence our $500 monthly payment?
Jesse
Friday, June 10, 2011
You still are paying insurance, property taxes and maint. on the property. $500 per month is probably a little low. It will most likely cost you more than that. BUT...You are still making a good return!
sharon
5/29/2011 5:39:49 AM
hey in the cashflow calculation....the costs of insurance, property tax, management, vacancy, and maintenance were left out.
Sheila Almariz
5/29/2011 3:06:41 PM
Hi Robert, Good day! I am very inspired by the lessons I learned from your book- Cashflow Quadrant At my early age, 21 - I came to realize how important Financial Education is. I’ve been watching your videos on youtube and make notes out of it. My mind is open to know a lot more from your strategies; I know it would be hard at first but its worth to spend time knowing that it would help me grow to have the right mindset in BUSINESS. I’l keep posted here and continue learning from your page as well..
adriana
6/22/2011 11:42:58 AM
i actually did that with one of my houses, i used the equity in my home and put 20,000 into a new home and rented it out. 3 years later my home is worth a lot more and i have a tenant paying the mortgage and expenses and i have equity now in the home, to borrow from again and purchase another home. it works!!!
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