Why You Should Not Pay Cash for Everything
Many people, with Dave Ramsey being the most popular, are talking about how evil debt is. They say that no one should use debt to buy anything and the only way to get ahead in life is to pay cash. I do not agree at all with that viewpoint. In fact, I think paying cash and avoiding debt can greatly slow down the wealth building process.
Of course debt can be bad in many situations. I am not saying it is smart to go buy the most expensive car you can afford maxing yourself out on a loan. I am talking about using debt to grow your business or to invest with. You must be smart when you use debt by not stretching yourself too thin, or not planning for bad situations that may occur. If you plan for the worst, find the right debt, use it for growth, it can be a wonderful thing! I have bought 20 rentals in my career, and flipped over 140 houses, using debt for all of them. I still had some skin in the game and did not finance everything 100 percent, but using debt makes me more money and I think can actually be safer than paying cash.
Here is an example of debt making me more money with real estate
I love to flip houses and usually make about $30,000 on a flip using financing. I typically finance from 75 percent of the purchase price to 100 percent of the purchase price and pay for the repairs and carrying costs myself. Those financing costs can be from $4,000 to $12,000 depending on the house and the type of financing I use. I may need $50,000 of my own cash to flip a house using financing. If I pay cash for the house I would save that $4,000 to $12,000 in loan costs, but I would need $150,000 to $200,000 in cash. I can flip three times as many houses using loans. That means I make $90,000 by doing three flipswith loans, instead of making $40,000 on one flip using cash.
The video below goes into more detail on how debt makes me more money with rentals and flips.
I have many more articles on my blog about using loans over straight cash. One thing that is super important in anyone's like is having a safety net. If you have cash in reserves for emergencies, a loan can be a safe investment.
https://investfourmore.com/2017/10/27/not-pay-cash-everything/
https://investfourmore.com/2013/08/28/should-you-pay-cash-for-a-rental-property/
https://investfourmore.com/2018/01/08/how-to-protect-yourself-from-a-real-estate-crash/
I have always heard that there are 2 types of debt, good debt and bad debt, I am not sure but I think you are talking about that kind of good debt which is the one that is good to use as long as it is used well, by the way it is having a safety net?
I think a little different on good versus bad debt too. I think the terms of the debt are important; interest rate, fees, etc. But I don't care as much about what the debt is against. I have a loan on my Lambo. Yes I could have paid cash, but I can make so much more with that money in real estate than in the car. It also helps the car went up in value, not down. I wrote an article on this too. https://investfourmore.com/2014/12/24/good-versus-bad-debt-investing-real-estate/
Debt that makes you money is a good thing and money in saving account that does nothing is bad in my opinion.
True, but at the same time you need some liquid money. You have to have access to some cash if emergencies come up, but it doesn't have to be in a savings account.
Yes there is a balance that is needed. Just saying saving all you money that is there and don't buy noting is not good.
Exactly,, smart investing! thank you!looking forward on reading more of your articles
Thank you!!
This is very true. It's important to know the difference between leveraging debt and using debt. Leveraging debt can be extremely beneficial and profitable if you do it correctly like you discuss in this article.
Thanks @bunnymoney
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I never tried loan but yeah many people gain hood profit in this money making strategy.
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