Lesson 5: Liabilities ( Good and bad debts)
A lot of people believe in "UOM", it means " Use other people money". They would tell you that even big corporations in the world have to survive on liabilities, everyone needs to borrow money.If you do not borrow, you can not suceed in your business! I certainly agree that liabilities are necessary for you to build wealth fast, if you want to depend on your salary to get your first million, you may need to wait for at least 40 years. There are a few fast ways for you to get rich,
a) Your parents are rich and you inherit the wealth
b) Your spouse is rich and you share the wealth with him/her.
c) You are lucky and win the lottery. Congratulations
!d) You are poor as well as your spouse and both your parents, therefore you have to make it! ( the process can be made faster if you know how to do it!)
For you to own your first million,you have to build your wealth slowly, sometime this process can be made faster by borrowing money, however, it may also lead you to end up with a lot of problems if you borrow the wrong debts!
I am going to tell what is a good and a bad debt. If you are borrowing money to buy/ own some thing that would increase in value in long run, congratulations, you are doing the right thing! Things that I consider would increase in value in long run include houses, land, business empire, intelectual property etc. On the other hand, if you are borrowing money to buy some thing that would depreciate in value, sorry, sir , you are actually getting yourself into problems.
You are not encouraged to borrow money to buy things that would depreciate in value such as car, your home electrical appliances etc. You may be suprised " What ? You are asking me to buy car with CASH!" Yes, yes, yes, if possible, you are encouraged to buy car with CASH,CASH, CASH!!"
You would be suprised to find out that more than 90% of cars on road in any country in this world are actually owned by banks and not their owners. Young graduates prefer to buy cars than anything else once they get their first salary. Their debts would esclate further if you know the facts that majority of US graduates have an average US 20,000 debts once they leave the college.
So, I am suggesting to you , if possible, do the following after you graduate from college,
a) settle your study loans as soon as possible ( or settle loans that have highest interest rate! It is your credit card loans that has highest interest rate )
b) save some money and if possible pay more than half the price if you want to buy a car, your loan period should not more than 2 years,
c) keep some money for emergency fund
d) pay yourself first every month and use that money to invest in something that would increase in value in long run.