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DEBT IS GOOD?!
Most people view debt as something dangerous - an obstacle that holds them back from financial freedom. While it’s true that high-interest debt (like credit card debt) can ruin your finances, strategic debt is actually a powerful tool for wealth creation.
Money Make Money
Debt creates wealth by allowing you to leverage other people’s money to invest in assets that grow in value or generate income. Instead of using all your own capital, you borrow money to acquire assets - like real estate or a business, that will provide returns greater than the cost of the debt.
Example:
You borrow £200,000 to buy a rental property. The property appreciates by 5% each year, and you earn rental income of £1,500/month. Over time, the property’s value increases, and the rental income exceeds the cost of the loan. By using debt, you're able to grow your wealth faster than if you had used only your own money.
(only works well when you borrow at a low interest rate)
Why did I mainly use real estate as an example?
A manufacturing firm can borrow heavily to buy new factory machinery. A tech company can borrow to buy tons of servers.
But these things don't go up in value. That's the problem
These machinery's, transports, actually loses value every year. The depreciation on the tax return reflects a very real loss in the asset's worth. After 5 years, those trucks are worth a fraction of their original price.
A well-located building, however, often appreciates in real-world market value over time due to inflation and demand.
Debt for Tax benefits
Trump has famously used real estate and loans to grow his empire while simultaneously reducing his tax burden. By borrowing money to finance deals and then leveraging tax deductions, such as interest and depreciation, he has minimized taxes while expanding his assets.
How?
Interest Payments: The interest on loans used to acquire or improve a commercial property is a business expense. Just like a bakery deducts the cost of flour, a developer deducts the cost of their loan interest. This reduces their taxable rental income right away.
2.
Depreciation (The Paper Loss): This is the real trick. Tax law allows a property owner to deduct a portion of a building's value each year for "wear and tear," even if the building's actual market value is going up. For a multi-million dollar skyscraper, this creates an enormous "paper loss" that requires no cash to be spent.
Now, let's bring this back to reality for most people. This high-leverage strategy is a world away from the financial life of a typical employee. The average person's debt is personal - a mortgage on a home you live in, a car loan, credit cards. Where the interest is generally not tax-deductible.
Bad debt? Overspending your credit card
Disclaimer: Everything on this page is for informational and entertainment purposes only - none of it is financial advice.
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