Rich Dad Scam #7: Get Out Of Debt image

Rich Dad Scam #7: Get Out Of Debt

This is the seventh post in a series I’m calling Rich Dad Scams, which are lies perpetrated on the poor and middle class by the rich. If you’ve been following along with the series, you may see some patterns in Rich Dad Scams. Several of them go together, and they all come from the same mindset. Saving money, living below your means, and this Rich Dad Scam, “Getting Out of Debt,” all come from one place: Being afraid of money.

Just like all the other scams, the idea that you have to get out of debt and stay out of debt to be successful is a lie, and it gets repeated because people don’t have a financial education. They simply don’t really understand what money is, how it works, and how to put it to work.

Isn’t debt bad?

The Rich Dad Scams we identify are the ways the rich stay rich and make sure the poor stay poor. That can be counterintuitive, especially when some of the scams, like getting out of debt and saving money, seem like they would help you get rich. But that’s the scam.

The rich carry debt. They generally carry a lot of debt. But they have assets that more than make up for the debt the carry. In fact, the rich not only carry debt, they also use it to get richer. The difference between the rich and poor when it comes to debt is understanding the difference between good debt and bad debt.

Good debt versus bad

Bad debt is debt that makes you poorer, such as credit card debt, car loans, and more. This is the type of debt used to buy liabilities.

Good debt is debt that makes you richer, such as a loan for investment property or to purchase equipment for your business that will make you a return. This is the type of debt that is used to buy assets.

An easy example of good debt is my real estate holdings. By getting a loan from the bank, I can purchase a property with only a small percentage out of my pocket. I then rent that property and my tenant pays the cost of the debt while putting money in my pocket.

Business is the same as the real estate example. You have good debt that pays for itself. The cash flow of your business covers the debt and generates income. That income can be turned into more good debt to create more cash flow.

We’ve been taught to think of debt as a four-letter word, but it doesn’t have to be. Especially once you have the financial education to see how it can work for you instead of against you.

How money works for you

I have an excellent example of how the good debt concept works. Say I have $100,000. Maybe I inherited it, or sold something valuable. But I have this money. I can put it into a mutual fund, which is a little better than saving it. The return on it would be a bit more than just putting it in savings, but it won’t be a lot.

However, if I use that $100,000 as a down payment on a $500,000 property, then I’ve actually bought $500,000 in value with just $100,000! The difference, that $400,000, is good debt.

This is exactly what my wife Kim did on a smaller scale with her first investment. She bought a $45,000 house with a $5,000 down payment, acquiring $40,000 in good debt, and she put that property to work. The tenants paid the mortgage and the taxes on it for her. She was profiting, or generating a positive cash flow of $25 a month. It wasn’t a lot, but it was a start. She used the same practice over and over again, and she kept putting that money to work. Today, she invests in millions, but the concept is the same.

Today, rather than buy into the lie of Rich Dad Scam #7, “Get Out of Debt,” I encourage you to instead increase your education and begin learning how you can make good debt work for you.

Original publish date: April 19, 2013