Mention debt and a majority of Kenyans panic.
While many understand that debt is something that is becoming increasingly impossible to avoid in our economy, only a few have been able to use debt to their advantage.
There are so many television shows, books, and magazines devoted to teaching people about getting out of debt. While debt can be seen as a negative measure, it can also be a positive one if used properly.
Here are five ways that debt through the use of leverage can make you richer.
The first step to turning debt into wealth is to determine exactly how much money you have coming in, and how much you have going out.
In other words, what does your personal cash flow statement look like? If you have more money going out than you have coming in, then one of two things need to occur (or both): increase your income, and reduce your expenses.
Making your Savings Work Harder
Many people like to keep money in a cash savings bank account as ‘emergency’ funds or a ‘buffer’ which makes them feel more secure.
Debt recycling is where, as you pay off your home loan, you redraw the equity you have built up to invest in shares or other property; again, the bad debt becomes a good debt that can earn you an income and can be used to pay back the loan, as well as providing tax breaks.
Any excess income can also be fed back into your home loan to pay that off quicker and make further interest savings.
Hedge funds are some of the biggest users of leverage. They are famous for generating abnormal returns by using leverage. Many hedge funds lever up to 10 times their total assets.
Billionaire hedge fund managers like John Paulson have used leverage to turn accredited investors into multimillionaires.
Once you have paid off your loans, it’s time to focus on turning that former debt into wealth. Continue to have a saving attitude so you regularly invest part of your income in a plain vanilla stock market index fund.
By doing this you keep your risk low while still taking advantage of the great returns the stock market provides, and allow compound interest to help you make the kind of money that you desire.
Servicing multiple debts is probably costing you way more than you need to be paying in interest and fees.
It can often benefit you, for example, to increase your mortgage and use the extra funds to pay off other, inefficient bad debt like credit card balances and personal loans.
Your home loan repayments may stay the same but you will be using its lower interest rate to pay off higher interest debt.