Robert Kiyosaki Says Good Debt Makes You Richer — Here’s How

Robert Kiyosaki has a net worth of around $100 million. He got there by making prudent investments and creating one of the most popular financial brands of the last few decades — “Rich Dad Poor Dad.”

One reason Kiyosaki stands out in the crowded world of financial gurus is his embrace of debt. He wrote on his blog that thinking you need to get out of debt entirely will keep you poor. Here’s why.

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Kiyosaki: Debt Isn’t Always Bad

Dave Ramsey and many other financial experts advise against borrowing money for any reason. Kiyosaki thinks differently. He says the ultra-wealthy actually carry a lot of debt — contrary to popular belief.

The difference between the rich and poor, according to Kiyosaki, is how they think about debt. The wealthy understand the difference between good and bad debt — and then use good debt to increase their fortunes faster.

He says learning the difference between these two types of debt levels the playing field. When the average person starts using good debt to their advantage, they open up the door to wealth.

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What Is Good Debt?

Kiyosaki says good debt is any money you borrow that helps you build wealth. This typically means loans you take out to acquire income-generating assets, including:

  • Real estate and rental properties
  • Profitable businesses
  • Other income-producing investments.

He calls this kind of debt good, because it generates income or helps you build wealth that outpaces the cost of borrowing the money.

How Good Debt Makes You Richer

It’s helpful to look at an example when learning how to leverage good debt to increase your net worth. Kiyosaki teaches this lesson by talking about his real estate investments.

He wrote, “By getting a loan from the bank, one can purchase a property with only a small percentage out of pocket … Then, they rent that property, and their tenant pays the cost of the debt while putting money in their pocket.”

He offered this scenario: You have $100,000 in cash and use it to purchase a rental property without a mortgage, which generates $800 per month in cash flow. That’s about a 9% return.

Or you take that $100,000 and split it into five equal down payments of $20,000, borrowing the remaining $80,000 for each property from the bank. If you look at the math, Kiyosaki said, this strategy leads to an annual return of 18% — double what you would have gotten by purchasing a single home outright.

The money you borrowed in the second scenario is good debt, because it pays for itself. You can use the same strategy to purchase businesses and other assets that generate enough income to beat the cost of interest when borrowing money.

Getting Out of Bad Debt and Into Good Debt

Kiyosaki’s strategy is only realistic if you borrow money at a decent interest rate. Otherwise, the cost of interest will eat too heavily into your profits. Plus, banks usually don’t loan much money to people who already have lots of consumer debt.

That means you may need to learn how to get out of debt before you can start using it to your advantage. Here are three steps to go from bad debt to good.

1. Create a Budget That Gets Rid of Bad Debt

Begin by looking at your monthly budget. Take your income and subtract all mandatory expenses from it, such as rent, health insurance and groceries. The number you’re left with is the maximum amount you can allocate toward paying off bad debt every month.

For example, if you take home $4,000 monthly and spend $3,000 on unavoidable expenses, you can allocate a maximum of $1,000 to your debt payments, unless you pick up a new side hustle to increase your income. This tells you how many months it will take to get rid of your bad debt.

2. Improve Your Credit Score

Your credit score should improve as you work to pay off your debt. The higher it goes, the likelier you are to get approval for future loans. Improving your score will also help you get better rates on those loans, so you can earn more money through Kiyosaki’s method.

3. Shop for the Best Deals on Debt

Once you have a good credit score and no bad debt on the books, you can start looking for loans to purchase income-generating assets. However, don’t accept the first offer you get. You should ask for rate sheets from at least a few banks to make sure you’re getting the best deal possible.

Alternative Points of View and Risks

Kiyosaki’s strategy isn’t without risks. It’s important to acknowledge these before proceeding, so you don’t get yourself into financial trouble following his advice. In fact, Ramsey says Kiyosaki’s view of good debt is plain wrong, because it ignores risk.

If you follow Kiyosaki’s strategy, you’re relying on the assets you purchase to continue generating income. If they stop doing that for any reason, you’re on the hook for the entire debt payment, which you may not be able to afford.

You may think you could just sell the assets if that happens. But that’s not always true. Consider the housing market crash of 2008-09. If you used Kiyosaki’s strategy to buy rental properties then, and your renters stopped paying, you might be forced to sell for a loss. This could erase any profits you made from the so-called “good debt” entirely.

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This article originally appeared on Robert Kiyosaki Says Good Debt Makes You Richer — Here’s How

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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