This guest post was written by 14-year-old blogger, Tushar Dhoot.
It takes a good businessman (or businesswoman for the feminists out there) to manage their finances properly, and to take the cash at their disposal and get the best return for it. We hear stories about these kinds of people all the time. It takes a truly gifted businessman, however, to make the most of what they don’t have, and to make money off the cash that is not at their disposal. The stories of these people are the ones that the mainstream media doesn’t cover.
What do I mean by making the most of what you don’t have? Debt management and making money off your debt, of course! This is a topic that John has often preached about on this blog, and while I am a fierce opponent of racking up credit card debt because of the gateway I believe it creates, I still understand and value the power of making debt work in your favour, and basically, making the most of what you don’t have.
The first, and probably most obvious, part of debt management is to juggle it to lower the interest rates on your loans. This can help you pay off your loan in a less amount of time, and therefore also help you save thousands on your loan. Just like a bad commercial, however, there’s that “But wait! Buy now and get..” moment here too. So not only do repay your loan faster and cheaper, but doing so can also substantially increase your credit rating, and help you get a loan easier and for a lower interest rate in the future.
The way this works, is that you go loan hunting, looking specifically for a lower interest rate than whatever you’re paying right now. Once you find the best deal, you shift your entire debt from the loan with the high interest into the loan with the lower interest rate. Now you just pocket the savings. So if, for example, company A charges you 5.5% for a loan, and company B can offer you the same loan for a lower 4.0%, you’ve just saved 1.5% per year on that loan!
This is the kind of good debt you’re always hearing about. I know John’s always talking about, and most of the time, he’s right. Investment debt is basically finding someone to give you a loan for a lower interest rate than what you can make from your business or a business opportunity. This is great for online businesses because a lot of them, if managed correctly, grow exponentially, and in a world of single-digit loan rates, you’re going to make some big money.
When you do start to acquire some debt to invest, you want to first calculate your rate of return. I don’t want to make this a financial 101 class, so I’ll just simplify it and say a rate of return is basically how much you make back on your money per year in % (percent)format. Then you just have to go out and find a loan with a interest rate that is less than your rate of return, and invest the borrowed money alongside your own.
One thing that is vital to understand is that, while you may be making a smaller percentage of profit on the borrowed money, you will make more overall because you are basically making a profit on money you never had. So if Jack had $10,000 to put into a business that paid him 15% return, and he borrowed an additional $10,000, he would make 6% on $20,000 instead of $10,000. Sure, he’ll make less on the additional 10 grand because he will have to pay interest, but the fact that he’s making more overall should be enough to entice him.
This is the final, less common, form of good debt. It’s when you take debt from a loan, and then put it into the bank so they can pay you. This only makes you money if the bank is paying you more than you are paying the creditor in interest. The reason this isn’t so common is because most banks are offering approximately the same, if not the exact same, rate for you to keep your money in their vault. They have to make a profit, so they will almost always charge a higher rate on loans then what they pay for deposits.
If you have a good credit rating, however, most banks will be willing to give you an introductory low rate. This can be for a short amount of time, like 1 or 2 months, or for a long time, such as 2 years. What you do is take the loan, put it into a high-interest savings account, and profit off the difference. When the time to pay up comes around, you just take out what you need and pay them back. The rest is yours to keep.
So that’s how I think you can make the most of what you don’t have. As with all things financial, however, I stress the importance of you researching what you’re doing and thinking it over. The last thing I would want to do was hear about someone harming their finances because they tried one of these strategies and failed. These can, and do work, if used correctly. That’s it for now, and until next time, keep making the most of what you don’t have!