13 May 2010. As promised I am back today with a blog on the second new rule of money: Learn to deal with debt.
Good debt and bad debt.
Good debt is debt that earns you money. Bad debt is debt that costs you money. A few examples. Your mortgage is a bad debt. Your car lease is a bad debt. The mortgage of your property investment that you have rented out and that brings in positive cash flow is good debt, because other people are paying for your mortgage and more, since you have created positive cash flow.
Assets and liabilities.
Assets are things that put money in your pocket. Liabilties are things that take money from your pocket. I know this a totally different distinction from what we are used to. Ask your accountant or bookkeeper. The banker that finances your house says that your house is an asset and he is right and it is not your asset but the banks asset. If you are not sure, try to stop paying your mortgage for several months and you will discover who owns your house, when the bank forecloses.The same goes with your taxes. As long as you haven’t paid of your mortgage the house is the banks property although the legal documents say otherwise.
Why is it so important to know the difference between good debt and bad debt? For a lot of people debt is bad. Actually debt is neither good nor bad. Debt is just debt. Since Richard Nixon took the US dollar of the Bretton Woods Agreement in 1971 we don’t have money anymore, only currency. So how do we create money since then? By creating debt. Here the distinction fractional reserve banking comes in. The bank pays you 3% interest for your money and they are alllowed to create 25 times more money then they are having in their vaults and ask 25 x 6% = 150%. So you can see how they make money. If it is so easy to earn such a lot of money by creatting debt, don’t you think it is important to learn how to deal with debt?
Source: Robert T. Kiyosaki, The Conspiracy Of The Rich, The Eight New Rules Of Money.