How to use debt to create wealth

Debt is used to buy things you cannot afford to pay for in cash right now. When that’s a pair of designer shoes you don’t need, you’re not creating wealth.  This is what some people call bad debt.

But it’s a myth that debt is always bad! In fact, sometimes it’s the best way, and often the only way, to grow your family wealth!

Just think of a home loan that gives your family a home to call their own and becomes part of your generational wealth legacy. Or a study loan that pays for a course where you learn the skills you need to get a better paying job, so you can create a better life for you and your family.

You can also bust the myth and use debt wisely to grow your wealth. Here’s how.

Use debt to buy a family home or property to rent

A home is an asset you can take care of, improve and leave to your children when you pass away. Second properties, such as an apartment that can be rented out, can be used to generate a second income.

Owning property is a goal for most of us, but very few of us can afford to buy a property for cash. A home loan, from a bank or a bond originator such as Ooba, is how most people buy homes. Home loans usually have a term of between 20 to 30 years, which makes the repayments affordable. Plus, the interest rates are low, usually around one or two percentage points above or below prime.

Use debt to buy an asset that increases in value and you build generational wealth

Use debt to fund your education

Whether it’s a three-year university degree or a three-month course, acquiring skills gives you the opportunity to find work or, if you are already employed, to earn more as you grow your career.

You can use your skills in your chosen profession, or to start your own business. You can also use your skills to run a side hustle after hours to generate a second income.

Education is expensive. However, banks and other organisations such as corporates and government offer student loans to help you pay for a good education. Just like home loans, student loans usually have low interest rates, and repayment of the amount loaned is deferred until you qualify (although you may need to pay interest from the time you take out the loan).

Use debt to start or buy a business

Got a great business idea but need funds for equipment and premises? Or, do you want to buy a franchise in a great location? Although some businesses require only a few hundred rand to start, many require more than is in your bank balance or savings account.

Banks, financial institutions such as Lulalend and government organisations such as the IDC and SEDA offer loans to people wanting to start, buy or grow a business. Yes, there will be some red tape in the application process but do your homework and draw up a solid business plan, and you can qualify for a loan at a very low rate.

Grow your business, pay off the loan and in a few years you will not only be growing your generational wealth into a valuable legacy you can leave to future generations, you’ll also be an inspiration to others. And, if you employ staff, you’ll be helping others earn an income and grow their wealth, which is also great for the economy!

Read more on How to fund your start-up business.

Be debt smart

According to the 1Life Generational Wealth Survey, 37% of South Africans are creating generational wealth by completing their tertiary education, 25% by buying property and 24% by starting or growing a business. In most cases, these respondents would have used good debt to finance their dreams for themselves and their families. And you can too!

So, now that you know how to use debt to grow your wealth, get planning! You don’t have to do everything at once, or in a rush. Take your time, plan ahead, know exactly how you will use debt to create generational wealth, and always make sure you can afford the repayments on any loan you take.

Six tips to help you manage your debt well

  1. Pay the amount due, or more, on time – when it is due.
  2. Know what admin fees and other charges apply, and when they must be paid.
  3. Know the interest rate you are charged, as well as if and when it can change.
  4. Make sure you can afford the repayments if interest rates rise.
  5. Talk to your creditors if you run into financial difficulty.
  6. Make sure your debts are insured with credit life or life insurance.
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