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Can debt make you rich?

By Judy Martel · Bankrate.com
Monday, March 25, 2013
Posted: 6 am ET

Debt is a tricky topic when it comes to building wealth. From investing on margin to buying and flipping real estate, there's no shortage of true believers waiting to advise supplicants on how to leverage their way into a pile of money and a life of ease.

More often, excessive use of debt leads to ruin rather than riches.

The problem is that most people already carry too much debt and risking more, or "doubling down" as they say in Las Vegas, only leads to serious financial trouble.

"Debt makes a good servant but a horrible master," says Jason Flurry, financial planner and president of Legacy Partners Financial Group in Woodstock, Ga. "Unfortunately it's becoming more and more the case where it's the master."

U.S. Census Bureau data show that the median level of debt among typical U.S. households rose by 37 percent between 2000 and 2011. For those aged 65 and older, it soared by almost 120 percent. The reasons include a recession-damaged retirement portfolio, increased mortgage debt and lower interest rates on fixed income. For seniors, the biggest reason the level of debt rose is because more of them are carrying mortgages.

Necessity aside, when debt is a choice it can be hard to determine how to use it to your advantage. Certainly, there are instances where it's smart to employ credit and debt, Flurry says. Buying a car with zero percent interest is one, but only if the loan is paid off on time. Mortgages are necessary for most people who want to purchase a home, but if home prices rise, the borrower can build wealth through increased home equity.

Boom or bust?

When it comes to speculation, however, many people are dazzled by "quick-buck" possibilities and refuse to acknowledge the pitfalls. Whether the game is equity investing, stamp collecting or real estate, it requires skill, in-depth knowledge, timing and luck.

The recent real estate crash provides plenty of cautionary tales. Flurry says he witnessed developers becoming entangled in a trap when they snapped up small tracts of land during the real estate bubble and turned them into mini strip malls with a few stores and restaurants. "They were making a killing off it," he says, by buying the land, attracting small businesses and then collecting huge rents. "All of a sudden, it just stopped" when the bubble burst. Business owners vacated, rents went unpaid and many of these developments were taken back by the banks, leaving the developer in bankruptcy.

There's no rule of thumb for how much debt a person should risk to gain a return, Flurry says, but from a common-sense standpoint, any money gambled should be discretionary. "From a planning perspective, we are goals-based. So we want to make sure there is a solid foundation in place and 100 percent of expenses are covered" not only for your current lifestyle, but for future goals, he says. "Leverage should be the last piece of the puzzle."

For those who have a high risk tolerance, take a lesson from the rich. Flurry has a few clients worth more than $5 million who leverage a miniscule percentage of their portfolio for a passion. The clients have a high level of knowledge about what they're doing and are willing to lose the amount they're betting. Former developers might invest in small businesses or suburban developments, for example, while former investment wizards might buy on margin or invest in speculative commodities or stocks.

The bottom line for the average person, Flurry says, especially one who is approaching retirement, is to examine his portfolio from the perspective of cash flow and look at the big picture. "Having a solid financial foundation is not that sexy," he says, "but you have to first make sure that what you have will not get lost."

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5 Comments
johnnyd
March 26, 2013 at 6:45 pm

this is the funniest headline ever...yes get yourself into debt- you will be rich! I understand investing and risk..what happened to saving and being smart with your money

moonmac
March 26, 2013 at 1:34 pm

Money Manipulation Debt Nation!

Chris Koffend
March 26, 2013 at 12:39 pm

Oh thank God! When I saw this article, I figured before clicking that it was going to be some idiot espousing the values and benefits of debt and downplaying the role of personal responsibility. Your advice is overall excellent. However, too many people in this country do not understand that risk of debt. Too many people in this country have no intelligence when it comes to personal finance.

As a person who does not believe in debt for the most part, I do carry a mortgage, after paying 20% cash down and insuring that if either my working spouse or myself lost one of our jobs, our monthly mortgage payment would still not exceed 25% of our take-home income. Now divorced, I sure am glad we calculated how much we could afford to borrow using this method.

As to zero percent interest on car loans? I can only agree with doing this if you already have 100% of the cost of the car available as disposable savings - otherwise it is commonly used as an excuse to buy a car somebody cannot afford to drive.

Sean Cook
March 26, 2013 at 11:46 am

Sure....it's called Obamanomics.....and the IDIOT in the White House is living it to the max.