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Monday, September 23, 2013
The Rich Don't Save, They Borrow
As the Bank Negara Malaysa (BNM), the Malaysia Central Bank trying to tighten the borrowing rule, I’ve been reading a lot of articles lately about ways to get out of debt, and I’m not impressed at most of the articles that I've read. It's not that the articles are bad, I just don't really agree with most of the articles. I know that most of the articles will advice on repaying debt as soon as possible and have more savings and stuff like that, which I don't really agree as we are not optimizing the money well enough.
Having said so, I don't really mean that we should go and buy lots of stuff and then finally go into bankruptcy. In my opinion, one should really have the balance between debt and cash, in order to fully optimized the money to improve the lifestyle. In fact, a lot of affluent people have certain level of debts that they are comfortable with.
To begin with, there are two kinds of debt, often called “good” debt and “bad” debt. Good debt is the money that you borrowed and spend which will in turn generate income to you. Bad debt on the other hand is money that you borrowed and spend but will not generate income to you. While many financial planners or advisers categorized property loan as good debt and vehicle loan as bad debt, I don't really agree with that. Property loan might be "bad" debt if the property don't generate income, eg. you cannot rent out the property due to no tenant while a vehicle loan might be good debt, if the vehicle can turn out to be income generator, eg. car rental.
Having no debt can be a good thing, but one will not be able to take advantage of the current low interest scenario, and for every dollar you save in the banks, earning you less in interest than inflation and thus losing you money, represents a lot of money other people can use to make more money. The bank can lend out multiple dollars for every dollar they have stored in savings.
Always do what the rich do. Even if one have the cash, I will say it will definitely be a bad idea to buy a business, real estates or even stocks full cash without leveraging the low borrowing cost provided by the banks. We always read news about whenever the rich buy businesses, real estate, even stocks, they borrow money to do it, they get grants, subsidies, whatever. They use leverage to keep money working for them. The savers empower them. Even the Sage of Omaha embrace leveraging when it comes to private-equity buyout recently - read more on Berkshire-Heinz-Deal.
Having said so, it doesn't mean to say to go all out and leverage everything to buy on things that will not be generating income for us. One has to be smart, and buy smart and make more money than you pay for that money, otherwise you’ve got “bad” debt. “Bad” debt makes people poor, it doesn’t matter whether it is a nice car or a big screen HDTV or a bad investment. People still lose money whenever a debt is categorized as bad debt.
Saving isn’t the path to wealth, and the system isn’t corrupt either. It is just that not putting money into good use that makes the poor people poorer while the rich richer by fully optimizing their money. Incomes generated only determine one's capability in making money, but it will not bring one to the next level if he or she does not know how to utilized the money - and this is how the rich will then become wealthy. Read more on Rich or wealthy, which are you?
In conclusion, spent money (expenses and savings) is dead money, and dead money can’t make you anything. Money has to be put into good use to generate more money; and again this is why I named this blog Money Master, because as Money Master, we instruct the money to work for us - like what all the employers do, instruct the employees to generate money for them.