Using Debt to Open a new Income Stream
What if I gave you $10,000 and told you had to pay it back in 60 months? This debt has a 37.7% interest rate, so you're paying $372 per month for 60 months. After you have made your last payment, you would pay over $22,000 in total. Would you borrow this $10,000?
What if I told you that you could pay that debt off in 24 months instead of 60? What if I told you that if you paid it off in 60 months, you would make an additional $1,500 per month?
People fear debt because they use it for frivolous bullshit—the cars, the houses, the watch, the electronics, etc. The people who welcome debt are people who can make money when they get into debt.
Let's say you're a savvy businessperson and want to make some extra cash flow. You decide to go into the vending machine business. You go to a loan officer and borrow $10,000. It has a 37.7% interest rate, so you're paying $372 per month. You scout for 2 locations. Each location wants a beverage machine and a snack machine. The prices look like this (These are real numbers)
Beverage machine with a card reader upgrade $1,900 * 2
Snack Machine with a card reader upgrade $2,100 * 2
Shipping costs: $399
That's a total of $8,399. You use the remaining $1,601 to fill the machine and other business expenses.
After one month, each location makes $1,000, making a monthly gross of $2,000 in total. You take out $372 for debt service. You take out $500 to replenish your snack and beverage inventory. Your monthly costs are $872. Your net income is $1,128 per month.
What is your return on investment? You have an infinite return on your investment because you paid with 100% debt.
At this rate, you would pay over $22,000 in debt service after 60 months, but your net income would be over $67,000 in that same period! That's a $45,000 income increase over five years by taking out a $10,000 loan.
The average person doesn't think of debt in this way. They want to buy a $1,200 phone; they will charge it on their card and pay 33% interest over five years to pay it off. That $1,200 phone is probably worth $500 or less in that period, it does not make them any money each month, but they paid over $2,400 in total within those five years.
"This sounds all well and good, but I don't want to give away $12,000 extra for borrowing $10,000."
If this money came out of your pocket, I would agree with you. However, the new income you got from borrowing the $10,000 did not exist before. This is a win-win. Investors and business-minded people think:
"Yeah, I paid $12,000 extra; however, I gained a new income stream of $1,128 per month that didn't exist before. Let me repeat the process 100 times over."
Some of you may be thinking, "what if the investment doesn't make any money"? This happens, and that is why you must do your due diligence. Speak to and learn from successful people. Find out ways to succeed, not go in the blind and hope for the best. This is called gambling. One thing business savvy people tend not to do is gamble with money they cannot lose.
"Yeah, but what about if you already got the $10,000 and not making a penny. You are losing money?"
Use it as a learning experience. Make corrections to reduce your costs and loss. Make improvements to increase revenue. If that doesn't work, you can always use your job income to pay off the debt in the meantime. This is when you want to pay off the debt as quickly as possible. If this means downgrade for a few years, that's the price to get into a bad investment. The next time around, you will be much smarter and will handle the situation better.
Debt is like a gun. Don't fear it, master it! -Confidence Magnet, 07/23/2020
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