Debts are not necessarily a bad thing. In fact debts are a rich man’s best friend. This is because every wealthy man expanded his business empire by leveraging on debt financing. It is virtually impossible to have enough capital to expand business at every level. Providing access to capital to fund growth is the reason why banks were established.
The truth is that everybody owes and will owe at one time or the other. When you consider that even companies and governments owe then no one is exempted from debt. However there is a marked difference between the rich and the poor’s attitude towards debt. The rich manage their debts while the poor mismanage theirs. Proper management of debts entails:
Firstly, investing borrowed funds into ventures that will generate profitable returns. Wealthy people borrow to invest in opportunities they have researched on that are proven to make profit. The poor also borrow to invest. Unfortunately they neglect to do their due diligence to understand the opportunity thus getting their fingers burnt. Warren Buffett put it succinctly when he said, “the first law of building wealth is not to lose money, and the second law is to obey the first law.” Wealthy people have a “never lose money” mindset, especially when they use debt.
Secondly the wealthy seek for ways to speed up their repayments in order to reduce the burden of interest. For example starting out a business venture with debt, then later on bringing in partners to take up equity. Using this equity to repay down the loans is a good idea. They usually explore all avenues and focus on paying their creditors as quickly as possible. This helps to reduce some of the debt burden.
Now many times business performance may not go according to plan, as losses may occur. When this happens the wealthy do not dodge or run away from their obligations. Instead they face it by trying to see if they can renegotiate terms or seek alternative options to finance their facility. The poor man’s first inclination is to flee and hide himself away which sours the relationship with his creditor. Managing debts means accepting responsibility for your actions and taking steps to correct unwanted consequences.
A study of the rich also highlights their approach of not putting all their eggs in one basket. Even though they are not risk-averse, they seem to have several initiatives and opportunities in the pipeline always. They strive to acquire multiple streams of income. If a new stream does not go according to plan they clear up their outstanding from another stream and cut their losses. This is precisely the reason why banks fall over themselves to finance the wealthy – they seem to always have a way to pay back. Those outside the wealth league put all their eggs in one basket and when the basket falls they lose everything and are highly unlikely to possess a backup plan.
Finally successful management of debt also includes shopping around for the best terms and rates. The wealthy approach several finance institutions, compare offerings with a view to getting the best deal. The poor stays with the one opportunity he has found without venturing to look for more favorable ones. He thinks that if he calls the bluff of the financier he may not find another. He has no choice but to accept offers from the only bidder.
Start today to become more adroit and adept in your approach towards debt financing. There are stages in making wealth. You must try to implement these steps if you desire to make wealth. Debt is not evil! Debt is actually a good thing if you manage it wisely!