Growing your wealth is hard. It takes an unwavering commitment, a lotof time, and sometimes, borrowing money to make it a reality.
And while debt has gotten a bad rap over the past few decades, it can also be used to build wealth. Whether getting into debt inspires you to make a massive change in your life, or you use debt as leverage to grow a business, when used properly, debt is a tool.
Here are four ways that using debt can inspire growth, help build businesses, and be used as an asset and not just a liability.
Follow Your Frustrations
Mark Lawrence hated parking in Chicago. In fact, according to a recent interview with CNBC, he had racked up $5,000 in parking tickets because of the terrible parking options and rules that he couldn’t seem to follow.
This frustration led him to explore the idea of having property owners rent out private parking spots to individuals, avoiding costly tickets and bringing in extra income. He and two friends decided to pool together their savings and launch SpotHero, an app that helps you find open parking spots.
Fast-forward 12 years, and SpotHero has booked more than $1 billion in parking reservations (and collects 35% of that revenue as their fee).
Mark Lawrence used the motivation of his parking-fueled debt balance and frustration over big-city parking woes to build a solution. And that app has now made him millions of dollars and brought in hundreds of millions for the company.
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Debt Can Be a Wakeup Call
Dave Ramsey is one of the most recognizable voices in the personal finance space. He hosts a daily radio show with millions of listeners and has been on the New York Times bestseller list numerous times. But Dave Ramsey was not always a financial guru.
In fact, Ramsey got his start by wracking up over $2 million in real estate debt and then promptly losing it all, filing bankruptcy in 1988. His massive struggle with debt caused him to step back and try to figure out how to handle his finances in accordance with the Bible.
He ended up teaching classes at his church, and eventually wrote his first best-selling book, “Financial Peace.”
Dave Ramsey has since built a massive business around personal finance and business education, employing hundreds of team members, and has a net worth of over $200 million.
Getting into massive debt was a wakeup call, and caused Dave Ramsey to re-think how to handle money. He built a program based on sound financial principles and built a multi-million dollar business out of it.
Debt Can Help You Build Wealth
Not all debt is bad. Sometimes debt can help you build wealth faster than avoiding debt.
John Paul DeJoria is famous for building the Paul Mitchell hair care brand, and he launched The Patrón Spirits Company. Today, he’s worth over $2 billion and is invested in dozens of profitable companies.
But DeJoria didn’t come from money, and in fact, financed the startup costs of his first company after partnering with Paul Mitchell.
DeJoria worked for the factory at Redken Laboratories and became disenfranchised with the hair care industry after seeing all of the product testing done on animals. He teamed up with his friend Paul Mitchell, who was a luxury hairdresser at the time and started John Paul Mitchell Systems.
The pair didn’t have any money to their names, and DeJoria had to borrow money from his mom to help finance starting the company. Using what little savings they had and money from DeJoria’s mother, John Paul Mitchell Systems grew into the largest privately-held hair product company in the world.
DeJoria has such a strong conviction about the idea for the company that going into debt to build the company was not seen as a burden, but opened the door to build a multi-billion dollar company.
Debt Can Help You Avoid Taxes
In an expose on the wealthiest Americans, the Wall Street Journal revealed the strategy that many Americans use to avoid paying income taxes on their wealth while still living extravagantly.
It’s called “Buy, Borrow, Die.”
This strategy was also profiled by GOBankingRates recently, showcasing how taking on debt can actually help the rich continue to grow richer.
The idea is that many wealthy Americans have much of their wealth tied up in assets such as securities, real estate, company equity, and other holdings. When selling these assets, they would be required to pay capital gains taxes, which for the top 1% of Americans can be 20% (or more).
But a loophole to these taxes is the ability to borrow against the value of an asset, and the borrowed money is not taxed (as it must be repaid). The wealthiest Americans can simply get an “asset-based loan” that covers their living expenses and the minimum payment on those loans.
If you’re thinking “they have to repay the loans in full at some point”…you’re right.
But this is where the “die” part comes in. When a wealthy person dies, the asset-based loans go to the estate and can be repaid by selling assets that are left over. But those assets receive a “step up in basis” at death and thus aren’t taxed if they are sold right away.
While this might seem like an unfair tax loophole, regular Americans can do this as well. If you have a large investment portfolio in a taxable brokerage account, you can get a loan against the investments, and when you pass away, the investments can be sold to repay the loan in full and avoid a large tax bill.
Debt is often villainized by financial gurus that tell you to avoid it at all costs. But debt can also be the source of inspiration to grow a business, build wealth, and ultimately, make a difference. If you understand the difference between good debt and bad debt, you can use it as leverage to grow your net worth while reducing your risk at the same time. But debt can also destroy wealth when not used properly, so always proceed with caution when using it.
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