Yep, that’s right.  I have no intention of paying off this debt any time soon. For all I care, the bank I’m indebted to can continue to milk me for interest for many more years to come.

The above statements may sound a bit insane, but don’t call the asylum truck on me just yet.  Now that I have your attention, I’d like to elaborate more on why I would say such craziness.

To illustrate the rationale here, allow me to start with a simple example.  As I elaborate in my tutorial on free money, you can make money by putting all your purchases on a cash back credit card.  By paying off your credit card off in full, the bank is effectively giving you a renewable 0% loan each month.  So while you’re using the credit card bank’s money for 30 days, your money is busy earning you 3.50% APY interest in an online savings account.   So each month, you’re borrowing money at 0% to make a 3.50% APY return.  This strategy is a form of leverage and is the model upon which banks are based — using money at one rate to earn a higher return on that money somewhere else.  The difference is profit.

In my case, I borrowed $24,000 a couple years ago to purchase an income-producing asset.  That investment now produces monthly revenue of $670 and is still growing.  The debt costs me $85 a month.  After debt service is paid, this asset cash flows $585 per month.  This is a passive income stream I would not have otherwise had without borrowing the money, because at the time I didn’t have $24K in uncommitted cash just laying around looking for something to do.

On a future post I’ll talk about the particulars of this investment, however to keep things on topic, there are a couple points I want to highlight here:

1. You don’t need to have money to make money.  You can use other people’s money instead.
2. Not all debt is “bad”.  As long as the borrowed money is making more money than it’s costing, then you’re in a profit situation — and that’s a good thing.

As for the above investment, I will continue to reinvest my profits back into it instead of paying down my debt.  The reason being is that I make a greater return by reinvesting the profits than what the return would be if I instead applied the profits to the debt’s principal balance.

Are You Really Saying I Shouldn’t Pay Down My Debt?

The answer to this question is… it depends.  If you can make a greater return on investing the money than what the interest rate on your credit cards or other debt is, then the answer is “yes”, it makes sense not to pay more than the minimum payment.

Many people however have credit card debt with some hefty interest rates… 15%, 18%, 23% or higher.  Investments having greater yields than those rates are harder to find.  For people in this situation, they should continue to pay off their debt and look into debt consolidation as a way to lower the interest rate.  If after consolidation there is an investment that could produce a greater return, only then would it make sense to take a closer look at that opportunity.

Keeping It Safe

For folks who are in debt due to overspending on discretionary items, I strongly recommend that they first invest the time to get financially disciplined.  Debt is like a crowbar… it is a useful leverage tool for creating wealth, however it can also be dangerous to those who haven’t yet learned to manage it effectively.

Before purchasing any income-producing asset with leveraged money, always be sure you have the budget to make the debt payment from your existing income.  Covering the debt payment solely by the income of the new asset risks putting yourself in an unsafe financial position– especially should the asset not live up to revenue projections or suddenly stop generating cash flow.

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