Why the Rich Get Richer

I'm doing some research on finance.yahoo.com reading some article regarding the crude oil future. Then I found out that there are some FREE article for personal finance from Robert Kiyosaki, Suze Orman, etc. Perhaps, these website will help on our personal finance knowledge. Web link

Robert Kiyosaki has been a good teacher to me for financial advise. I have picked up lots of ideas and concept on finance from his books. There is one radio show on finance in where I live have this saying "If you don't care about Money, your Money won't care about you" (translate from "你不理财，财不理你") It's getting more important for us to learn personal finance in this global village environment. Below is the story on the topic "Putting Debt to Work for you."

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I attended my first real estate investment class in 1974. The two-day program cost me $385, which was a fortune at the time since my salary was less than $1,000 a month.

After months of searching for my first investment property, I found a tiny, one-bedroom, one-bath condo in Lahaina, Maui, the world famous beach resort. The condo was priced at $18,000. Not having any money, I used my credit card to finance the 10 percent down payment of $1,800.

In other words, I used 100 percent debt to buy the property.

Even though I was leveraged 100 percent, which I do not recommend even though I did it, I was netting approximately $20 a month positive cash flow after all expenses and debt were paid. At the age of 27, I owned a condo in Waikiki, in which I lived, and a condo in Lahaina, which I rented. My real estate investing career was launched -- and I was in debt up to my eyeballs.

The 'Credit Card Tycoon'

Being single at the time, several friends and I would get together regularly at a popular downtown Honolulu watering hole on Friday afternoon to have a few drinks and, if we were lucky, meet some of the pretty women who worked in downtown Honolulu. The Friday after closing on my Maui condo, I told my friends about my investment.

"Are you crazy?" asked one friend, a young attorney fresh out of law school.

"You're nuts," said another friend. "You purchased a condo with a credit card? Do you know how risky and foolish that is?"

"Yeah, but it's a great deal," I replied defensively.

My friends just continued to laugh at me, calling me the "Credit Card Tycoon." The more I defended myself, the more they ribbed me and the more they laughed. I finally gave up and went to talk to a group of pretty women.

About a year later, we were all together again at that same watering hole where we met almost every Friday.

"Well, how is the Credit Card Tycoon doing today?" asked a friend who was a young attorney. "Buy any more property with your credit cards?"

"No." I replied with a grin. "I sold one for $48,000. I made about a $30,000 profit in a year."

Although it was good to have the ribbing stop and to win my point, the most important lesson was that I had learned how to use debt to get richer. For more...

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What I learnt from this article is that, it's doesn't matter how much debt we have, if the debt (good debt) we owe can help you to gain an asset that generate more money than the interest that is charged to us, we are getting a good debt. In other words, the more debt we have the more money we'll generate.

For example, when we borrow money from bank to buy house for ourselves, most of us will be very eagerly to return the money to the bank so that we don't pay so much interest. To apply the "Putting debt to work for you" strategy, before we decide whether to return the money to the bank in advance, should be determine by whether we can find any investment that will provide us a return more than the interest. Let's say we are charged by the bank 6.5% annual rate interest. If we are able to find an investment that is 10% return, then we can go ahead and invest the money, and owe the bank as long as we can, since we are getting the extra 3.5% return.

If we are just letting the money to sit inside the bank for 4% Fixed deposit return, then it will be good for us to pay back the bank in advance since bank is charging us 6.5% and only paying us 4%. They are earning the extra 2.5%. Of course in this situation, we need to pay the bank back to money as soon as possible.

In short, it really depends on what % return we are getting compared to what is bank is charging to decide whether to clear the debt as soon as possible.