Do You Know Debt Can Be Delightful?
Aug 30, 2019

Author: Deepika Khude

(Image source: Image by rawpixel via freepik.com)

Last Sunday my mother and I went out shopping and while checking out, I pulled out my credit card to pay the bill. Little did I know that such a small gesture will tick my mom off! As soon as we left the mall, my mom yet again launched her (unsuccessful) trial against credit cards and how credit card companies are making us poorer by increasing our debt.

To be fair, my mom belongs to an era when delayed gratification was the norm; if you wanted something, you had to save for it and buy it later. She has been a lifelong advocate of living a debt free life. So, to her, my credit card is as big a demon as the mighty Ravana! In no mood to argue finance on a Sunday, I let it go.

On Monday, I narrated the story to my colleagues at lunch and to my absolute horror, they concurred with my mother. My "millennial" colleagues also opined that, "Debt is Demonic and Credit cards are the weapons of mass destruction".

[Read: Why Millennials Should Not Ignore Financial Planning]

I wondered, 'Was this the general perception about debt?' So I probed around, asking my friends and cousins and, sure enough, that's the perception a majority of them have!

If you were to ask an average middle class Indian household about their views on Debt, the probable answer is going to be; the sooner we get rid of it, the better.

But why do we need to get rid of Debt?

If I tell you that there's a common man earning US $ 1.40 million per month by simply leveraging his debt, would you change your opinion on Debt?

Let me introduce you to this common man. His name is Robert Kiyosaki. Some of you might know him as the author of "Rich Dad, Poor Dad", while some of you might not know him. That's okay. What's important to know about him is his philosophy of Debt.

In his book, "Rich Dad, Poor Dad", Robert Kiyosaki argues that there are 3 types of Income:

  1. Earned Income (salary)

  2. Portfolio Income (Capital appreciation and gains)

  3. Passive Income (income earned from assets not liabilities)

He further argues that the key to growing rich is to maximize the passive income (a thought concurred by Warren Buffett). But the key to maximizing the passive income is to maximize your assets and not liabilities. Any "asset" which takes money out of your pocket, instead of putting it in is a "foolish asset".

[Read: Do You know How Warren Buffett Manages His Wealth?]

You would be shocked to learn that Robert Kiyosaki, a man who makes US $ 1.40 million a month, does not own even a single property! Such a stark contrast to the average individual looking for real estate to invest in the hope of building a fortune!

We have all heard that Warren Buffet, having a net-worth of US $ 7,910 billion, lives in the same childhood home and not a million dollar mansion. Maybe he is humble or maybe he too follows the principle of not building "foolish assets".

Coming back to the story of Robert Kiyosaki and his US $ 1.40 million passive income strategy, he always cherished debt and spared no opportunity to get into debt. But he ensured that he always repaid the debt on time, every time. This helped him amass an outstanding credit score, which helped him secure a US $ 300 million loan from banks post the Lehman brother crisis that shook the financial world in 2008.

The banks gave him a loan of US $ 300 million simply backed by his credit score! He invested the 300 million dollars to buy 7,000 rental properties across the globe and at an average of US $2,000 rental; his monthly income from these properties is US $ 1.40 million/month or US $ 16.80 million annually!

It's not crazy, it's not ingenious, it's mere common sense. But as they say, common sense isn't that common

We are brought up in a society where the definition of debt is broadly akin to the spiritual notion of karma and, therefore, any debt is considered a burden. Forget about home loans, a simple gesture of your neighbor making biryani and giving you some for dinner leaves you in their debt unless you reciprocate the gesture. In scientific terms, it's called "reciprocity". Indian parents will never encourage you to be on the receiving end of reciprocity and this shapes our perception of debt throughout our lives. Perhaps, we pass this conditioning to our children as well.

Assume I get a loan for Rs 50 lakh from the bank. I have 2 options; either I buy a property from the same amount and earn a rental of Rs 10,000 per month, thereby building "foolish asset", or invest the Rs 50 lakh in building a real asset, i.e. buying a commercial property.

Scenario - 1: Buying a house and putting it up for rent.

 Particulars Amount (Rs)
Loan Amount 5,000,000
Loan Tenure 15 years
Loan Interest rate 9%
Monthly EMI 50,713
Rent Received 10,000
EMI Deficit 40,713
Total outflow 73,28,399


Scenario – 2: Investing the money in acquiring a commercial property and earning higher rentals.
 

 Particulars Amount (Rs)
Loan Amount 5,000,000
Loan Tenure 15 years
Loan Interest rate 9%
Monthly EMI 50,713
Rent Received 25,000
Surplus Cash 15,000
Future Value of Surplus Cash 75,68,640


​As you can see, in scenario 2, since you earn a rental of Rs 25,000 and the outflow is Rs 50,713, the cash outflow from your pocket is only Rs 25,713 as against the cash outflow of Rs 40,713 in scenario 1. If the difference of the two EMIs i.e. Rs 15,000 is invested in a diversified mutual fund, then at a growth rate of 12% p.a. the future value of your savings would be a whopping Rs 75.68 Lakhs! This is called leveraging your debt to create wealth.

[Read: Guide to Long Term Wealth Creation With Equity Mutual Funds]

We've all heard the life lessons of Ambani's and Tata's and how they came to the city with Rs 35 and made a fortune, do you seriously believe they did it without Debt?

At PersonalFN we take pride in assisting our clients to make informed investment decisions. We have had instances where our clients have dropped their plans to purchase fresh properties based on our analysis and advice. We believe that you can create wealth by nurturing your passive income sources and that there is no elixir of wealth strictly with the rich.

If you too are looking out for the assistance of an ethical and competent wealth manager who can help you realise your investment success story, look no further and connect with PersonalFN's Certified Financial Planners and Wealth Managers on 022-61361200 or write to info@personalfn.com. You may also fill in this form, and soon our experienced financial planners will reach out to you.

Till then, Happy Planning! And remember, Debt is Delightful if embraced and not abused.



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