Apr 182016
 

“The more debt I have the richer I get” 

It’s easy for the Irish to build wealth, because their capital is always Dublin. But the rest of us have to find others ways to grow our net worth. I recently listened to an episode of Palisade Radio, where the host, Collin Kettell, interviewed Robert Kiyosaki, an American investor and the author behind the Rich Dad Poor Dad book series. According to Robert, one way to build wealth is by using debt. Here’s a part of the interview.

“People think I am a real estate guy, but I am not. Really, I am a debt and taxes guy. You see, the more debt I have the richer I get, and the more debt I have the less taxes I pay…. The 1% does not pay tax. They are also deeply in debt, but it is good debt – debt that makes them rich.” ~ Robert K

I currently have $490,000 of debt. If Robert K. is correct then maybe I should borrow even more money so I can become financially independent sooner, haha. But in all seriousness he does bring up some interesting points. Borrowing money allows us to invest more than what we currently have in savings. This magnifies the returns or losses of our investments depending on how they perform. He also suggests that having more debt leads to lower taxes. This can also be true. For example if we buy a rental property with a 20% down payment then the interest we pay on the mortgage debt can be deducted from our salary which will lower our taxable income, which means we pay less tax. 🙂

16-04-pay-taxes-what-am-i-poor-meme

Robert is also not a fan of the 401(k), which is similar to the company matching RRSP program in Canada. He believes it’s basically another kind of tax. For example an American worker may put $100 into a 401(k) and their employer will supposedly “give” them another $100 for free. But Robert argues that this reasoning is bullocks because it’s suppose to be the worker’s $200 in the first place because it’s part of the cost to keep someone hired. “The company isn’t doing you any favors,” he claims.

“…They basically take your money before you get paid, and the poor, small worker, I feel for them. They do not have any idea what is going on. … It is basically a Ponzi scheme… Old guys with 401(k)s are starting to withdraw their money. How is the market going to go up when the money is coming out?” ~ Robert K

Although he makes some good points about the benefit of using debt to get ahead, there are also risks involved with borrowing too much money, especially when the money is poorly allocated. My friend Bridget from Money After Graduation has an MBA and she warns about the commonly forgotten risk of borrowing to invest.

Rate is Associated with Risk

She uses the example that we can choose between either paying off our student loan debt at 2% annual interest rate, or invest in the financial markets where we can reasonably expect to make 5% a year. At first glance investing seems to be the smarter choice because there’s an easy 3% gain to be had due to the difference in rates, a.k.a. arbitrage. 😀

But hold the ham sandwich! Bridget suggests that this isn’t the case because the rate of return is usually equal to the same level of risk. Normally if we buy a stock that pays 5% we have to assume the amount of risk that is appropriate for a 5% return. But if we’re borrowing to invest, or could be using the money to pay down student loans at 2% instead, then the actual risk we’re taking on is 7%, due to the extra 2% opportunity cost associated with our debt. Does it make sense to risk 7% for a 5% market return? Probably not.

I think both Robert and Bridget make some convincing arguments. Isolating certain issues about taxes, risk, and employer matching retirement plans make things easy to understand. But real life can be all sorts of complicated and we have to consider many factors in order to build a compelling financial plan for ourselves. A helpful way to determine if our financial decision is good or not is to explain it to other people. If we can’t convince our friends that we have a solid plan, then we should probably take another look at our decision. 😉

By the way, there’s a new reader’s poll on the right sidebar of the page. I look forward to the results so I can provide more interesting content. 😉

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Random Useless Fact:

French people everywhere are going nuts over this bag-uette.

16-04-baguette-french-starter-pack

 

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April if financial literacy monthSridharAnonRevolTaking over my portfolio Recent comment authors
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beth
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beth

Reagan, Bush, Cronkite and ???? Who are the other men in the picture? I know that has nothing to do with your topic today but you are the one who posted it.

Alford Bailey
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Alford Bailey

I’ve read Kiyosaki’s books and gleaned a lot of good info from him. Especially the differences between an asset and a liability, passive income, taxes ect. BUT, I think the use of debt at the level Robert proposes is very dangerous to most people. What you never here leverage proponents say is that debt is almost always paid back in different economic circumstances than that which it is borrowed in. Especially the longer term 20-30 year notes. Meanwhile the bank is making most of their money up front in economic conditions closest to that which they lent the money. IMO you should pay off a loan within 5-7 years and if you can’t think real hard about borrowing that money.

Anon
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Anon

“…the poor, small worker, I feel for them. They do not have any idea what is going on. … It is basically a Ponzi scheme… Old guys with 401(k)s are starting to withdraw their money. How is the market going to go up when the money is coming out?” ~ Robert K

Sounds like poor, small Robert K has no idea how the stock markets or economics operate.
He should stick to being a slum lord.

Taking over my portfolio
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Taking over my portfolio

I was surprised to hear about his corporate bankruptcy in 2015.

I also read a few of Robert’s books. His first one ‘Rich Dad-Poor Dad’ is a great starter book for someone who wants to understand real estate investments and I personally learned a lot. I still don’t own real estate as an investment but it is still on the table for the future.

Revol
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Revol

I love your puns and the random useless fact. These are two things that makes your blog very unique. Keep them up!

Anon
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Anon

It’s also hilarious (and misguided) to think of Robert Kiyosaki as any kind of financial genius or guru when all he’s done is ride the 35-year bond bull market — the main driver of his real estate scheme. His leverage got increasingly cheaper (and larger) and his assets got increasingly pricier.

What he’s done won’t work in an era of rising rates, ergo one-trick pony.

Sridhar
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Sridhar

I personally think that debt is not bad as long as its purpose and your ability to repay is not affected. In the student loan pay off vs. investing in stock I think the better/default option would be to invest savings in stocks while paying loans as per schedule (not fully). This would give the investor an opportunity to plan for her future while paying off low cost (2%) student loan comfortably. I would follow the same strategy for a mortgage unless I have large windfall savings to payoff my loan.
However, if the loan in case were to be a credit card debt then given higher interest rate of 15-20% the default choice is to pay off debts first because you dont have a choice in this situation.

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[…] money, using other people’s money. 😀 This is not a new idea. Financial experts such as Robert Kiyosaki have been using this lucrative strategy for decades to make millions. […]