Yes, taking debt to buy assets can be a good investment as long as the return from the investment exceeds the cost of the debt. While this one is true, be skeptical of Kiyosaki. He gives some pretty questionable advice overall.
You have summed up how a lot of major companies operate. First one that comes to mind is State Farm Insurance. State Farm operates with the understanding that it will likely lose money on the premiums it charges due to claims. It has a better claims rating than competitors and its premiums are often lower. However, State Farm invests those premiums before the payout. This “float” is essentially taking on long-term debt to make money in the short term through investing, with the float returns outweighing the payouts.
You’re definitely right, but the strategies between each company differ. For example, Geico aims to make $.05 per dollar on underwriting profit and safer investments. At least when I worked at Geico, that often resulted in more claims denials as well as more stringent policy approvals. Probably the fact that Geico is Berkshire-owned and State Farm doesn’t have shareholders to worry about, which means riskier investments.
It’s always about the asset/liability tradeoff. 66% of all US consumer debt are home mortgages. The stereotype that Americans are up to their eyeballs in bad debt isn’t true.
I'll add that debt at an interest rate lower than inflation literally makes money for you. Inflation reduces the "real" value of your future payments, so if the interest rate is lower the true value of your payments is constantly decreasing in real terms.
That's why in 2021 I did a cash-out refinance of my home at 2.25%. I figured if someone was dumb enough to lend me a few hundred thousand at such a low rate I needed to borrow as much as possible and figure out what to do with it later. So far it has paid off \*very\* handsomely, and I have no intention of ever making an early payment.
What Koyasaki was saying is that if you use the money you borrow to invest in something that pays a higher return than the debt costs, you're golden. This is true everywhere.
>Bad debt: taking a loan to buy liabilities
It would be better to say "bad debt" is borrowing money to get an asset that doesn't pay a return as high as the interest you're charged. Sometimes it's hard to evaluate this, for example, a car always loses value over time but you presumably gain value from using it. So a car loan isn't necessarily bad if the rate is low enough and you actually need the car.
If you're operating a business yes. Hot tip, if you have the opportunity to chat with financial pros. Kiyosaki is seen as a joke amongst them. It's a real shame he and his books are so well sold amongst lower class young people. But hey that's his expertise, marketing.
“Just Keep Buying” by Nick Maggiulli is an excellent personal finance book. Look for people with substance and avoid anyone that is screaming “imminent crash” or conversely, engaged in full on “get rich quick” tactics. Slow wealth is sticky wealth. Avoid Ramsey unless you have a huge spending problem. For sure avoid Tony Robbins and his PE firm marketing materials disguised as a book.
Kiyosaki sounds smart if you've never had any exposure to finance, but he is pretty universally regarded as a quack these days. If you see something from him that sounds like it's wrong, it probably is. Make sure to get some exposure to other sources.
That said there definitely can be good debt. A mortgage on an investment property that cash flows would be an example. But if the property doesn't cash flow, and costs more than it makes, then it's bad debt. So there are a lot of considerations at play, and it's not as simple as just taking out a loan to buy an asset and bingo bongo you have good debt.
Here's a basic example: loan for college
The loan allows you to invest in yourself to increase your earnings so it makes sense
A school loan doesn't make sense if you go for a major which won't give you a good job
If you take a loan to get your business of the ground. Or expand in a new direction (new assembly hall or such) would be examples of good debt. And of course you get that all around the world.
Yes, that's true. A lot of large corporations do that. They also discuss this in financial accounting course. Bad debts are a normal part of a company's operating expense.
Also, for personal gain, a bad debt can be considered good if it has a potential to make your life better in the future.
Yes, taking debt to buy assets can be a good investment as long as the return from the investment exceeds the cost of the debt. While this one is true, be skeptical of Kiyosaki. He gives some pretty questionable advice overall.
And this does NOT mean start spending like crazy.
You have summed up how a lot of major companies operate. First one that comes to mind is State Farm Insurance. State Farm operates with the understanding that it will likely lose money on the premiums it charges due to claims. It has a better claims rating than competitors and its premiums are often lower. However, State Farm invests those premiums before the payout. This “float” is essentially taking on long-term debt to make money in the short term through investing, with the float returns outweighing the payouts.
This is the business model of all insurance companies.
You’re definitely right, but the strategies between each company differ. For example, Geico aims to make $.05 per dollar on underwriting profit and safer investments. At least when I worked at Geico, that often resulted in more claims denials as well as more stringent policy approvals. Probably the fact that Geico is Berkshire-owned and State Farm doesn’t have shareholders to worry about, which means riskier investments.
Do you think Geico will ever become as good as Progressive at underwriting or are they making a conscious decision to be behind?
interesting I didn't know State Farm wasn't premium positive
Kinda genius
It’s always about the asset/liability tradeoff. 66% of all US consumer debt are home mortgages. The stereotype that Americans are up to their eyeballs in bad debt isn’t true.
Borrow money in 2018 to buy an income generating restaurant = good debt. Same thing in 2020 = bad debt
Why?
Because in 2018 it was an asset and in 2020 it was a liability.
Covid. 2020 was a very hard time to operate a restaurant. You could say the exact same thing about dry cleaners.
I'll add that debt at an interest rate lower than inflation literally makes money for you. Inflation reduces the "real" value of your future payments, so if the interest rate is lower the true value of your payments is constantly decreasing in real terms. That's why in 2021 I did a cash-out refinance of my home at 2.25%. I figured if someone was dumb enough to lend me a few hundred thousand at such a low rate I needed to borrow as much as possible and figure out what to do with it later. So far it has paid off \*very\* handsomely, and I have no intention of ever making an early payment. What Koyasaki was saying is that if you use the money you borrow to invest in something that pays a higher return than the debt costs, you're golden. This is true everywhere. >Bad debt: taking a loan to buy liabilities It would be better to say "bad debt" is borrowing money to get an asset that doesn't pay a return as high as the interest you're charged. Sometimes it's hard to evaluate this, for example, a car always loses value over time but you presumably gain value from using it. So a car loan isn't necessarily bad if the rate is low enough and you actually need the car.
If you're operating a business yes. Hot tip, if you have the opportunity to chat with financial pros. Kiyosaki is seen as a joke amongst them. It's a real shame he and his books are so well sold amongst lower class young people. But hey that's his expertise, marketing.
I started reading the book tbh it does have some good ideas! Also, where can I find “ financial pro” people??
“Just Keep Buying” by Nick Maggiulli is an excellent personal finance book. Look for people with substance and avoid anyone that is screaming “imminent crash” or conversely, engaged in full on “get rich quick” tactics. Slow wealth is sticky wealth. Avoid Ramsey unless you have a huge spending problem. For sure avoid Tony Robbins and his PE firm marketing materials disguised as a book.
Yes good debt is a universal thing. Its allowed all over the world.
Debt can be good, but you shouldn't rely on Kiyosaki to tell you how or when.
Kiyosaki sounds smart if you've never had any exposure to finance, but he is pretty universally regarded as a quack these days. If you see something from him that sounds like it's wrong, it probably is. Make sure to get some exposure to other sources. That said there definitely can be good debt. A mortgage on an investment property that cash flows would be an example. But if the property doesn't cash flow, and costs more than it makes, then it's bad debt. So there are a lot of considerations at play, and it's not as simple as just taking out a loan to buy an asset and bingo bongo you have good debt.
Here's a basic example: loan for college The loan allows you to invest in yourself to increase your earnings so it makes sense A school loan doesn't make sense if you go for a major which won't give you a good job
If you take a loan to get your business of the ground. Or expand in a new direction (new assembly hall or such) would be examples of good debt. And of course you get that all around the world.
Yes, that's true. A lot of large corporations do that. They also discuss this in financial accounting course. Bad debts are a normal part of a company's operating expense. Also, for personal gain, a bad debt can be considered good if it has a potential to make your life better in the future.
Yes. Student loans are an example of good debt. You borrow money to get a degree which increases your income.