Use Debt Like a Rich Person

You want to think about debt like a rich person, because if you don't understand debt, you don't understand how money works. So we got to figure this out. We're going to do it today together. It's not going to be that bad. I know the word debt sounds scary. It's not. Actually, debt can be your friend in many circumstances or your mortal enemy. Of course, this video is brought to you by the Entrepreneur's Field Guide book and guided course. The Five Day Entrepreneur. Get it all at nicholascrown.com. So much to learn if you're starting your business for the first time. Let's get into debt. Not literally get into debt. We're just going to learn about debt. What does debt and interest mean to you? Credit cards, loans, bonds, dividend yield on a stock, maybe a simple savings account that you've got with your bank. How about inflation? Yeah, that's negative interest on the cash in your pocket right now or the cash in my jacket right now. And you've got to understand debt if you want to understand how money works. So no offense, but you're probably screwing this up. Debt isn't evil. It's only evil if you're not earning more than the cost of the debt. If that sentence doesn't make any sense, don't worry. You're going to totally get it by the end of the video. You're not taking care of the worst things first, the worst debts on your account. I'm going to tell you which ones those are. You're not thinking about relative interest rate. You're just thinking about absolute interest rate. And finally, you think that cash can't lose value because it's cash and it's under your mattress and it's in your shoe box in your closet, right? Of course, cash gets charged interest to hold in the form of inflation. That means the cash in your pocket is losing purchasing power every single day a little bit at a time. Here's an episode breakdown. Number one, what is interest? I'm going to talk about the way that I define interest. This is probably something you've never seen before. In fact, I guarantee you it's not in the textbook. I call it the risk-adjusted model of interest. I know that sounds really fancy. It's very simple. Section two, we're going to talk about the biggest screw-ups and how you can avoid them. Section three, we're going to talk about strategies about how you can approach debt and actually a system that you can apply right now about going through and tackling the biggest risks and the most dangerous debts associated with your name. And finally, bonus round, using debt to make more money. This is an advanced concept. You kind of need to already have a pretty established reputation. You need to have a little bit of money in your pocket before you can start playing this game, but nevertheless, I want to show you why, you know, you hear rich people use debt. We're going to get to that at the end of the episode, so make sure you stick around. As always, if you love this video or you like this video, like, subscribe. We're going to make finance fun. We're going to make entrepreneurship fun. That's what we do here at Nicholas Crown. Section one, what is interest? All right, interest accounts for the risk between a borrower and a lender. So Uncle Tony, right, you go to give Uncle Tony 10 bucks. You're like, Uncle Tony, I need 20 bucks because I know what you're going to do with this 10 bucks. You're going to go down to the slot machines and, you know, I know you're not going to be good for it, so I'm going to need a whole 10 bucks back in order to give you this 10 bucks. Now imagine giving 10 bucks to a bank with gold in the basement of the bank and other deposits and hundreds of millions of dollars. Who do you think is more likely to pay you back, Uncle Tony or that big bank? So this is why Uncle Tony is going to pay you a higher interest rate in that safe haven, that bank down the street. You pay more to account for risk. Tony's risky and the bank is a lot less risky for paying you back. Now, here's the funny thing. You're likely the risk, so you've only been exposed to this on the other end, meaning, hey, I've got a credit card and I don't pay the credit card back and, oh my God, I owe 20% now. That's because you are the risk. You're like Uncle Tony. You know, sometimes you pay people back and sometimes you don't. So the less credit worthy you are, the higher interest rate you're going to pay. Another concept that's critical here is collateral. So if you say, hey, Uncle Tony, give me your right shoe and then I'll only take five bucks back. Collateral reduces the risk. Let's pretend that Uncle Tony doesn't pay you back. Well, now you got a shoe. You can sell it on eBay or sell it to a collector somewhere. He collects old shoes. I'm sure you're out there. Let's face it, this is how it works when you go to borrow money for a car or money for a home. That's called secured debt. That means the debt is being secured by a hard asset. If you don't pay it back, well, the bank takes your house and sells it. If you don't pay your car payment, well, the bank comes and takes your car and sells it. So the lower interest rate loans are gonna be the ones that are secured with an asset like a car or a house and the ones that are unsecured like a credit card, like going to Uncle Tony, these are gonna be higher interest rates and you've been the risk this whole time and you didn't know it. All right, here are the biggest screw ups, this section two. I like to say the devil is in your pocket. This is because the easiest and highest interest rates to rack up in the universe is credit card debt. So credit card debt, unsecured debt, oftentimes 20, 24%, I checked my credit card recently, 24% on my credit card. Meanwhile, I have a perfect credit score, absolute flawless credit reputation, but I'm paying 24%. What could be crazier than that? But this is the easiest debt to take on. You fill out a credit card application, it seems pretty easy, they send it in the mail. It seems almost pointless to be able to run up this amount of debt. Back in the day when you needed to loan money and there was no credit cards on every corner and every airplane flight you take, the flight attendant is handing you a credit card application, you had to go to some sketchy people like loan sharks to go and get some money to pay off your debt, maybe your gambling debt, maybe there was a illness in the family, you needed some cash. And I can assure you that these loan sharks charge similar rates to the credit card companies that are charging 20, 25% today. So here's how this works and this is why it's so scary. If you borrow at 20%, which is many credit cards have 20% interest rates right now, and you don't earn more than 20%, you have literally set up a machine for losing money indefinitely. So this is why if you're not gonna earn 20% more on your job you can't be running up credit card debt. Credit card debt you hear entrepreneurs, oh, I ran up all my credit cards. Well, these entrepreneurs are taking a huge gamble and they're saying, well, I'm gonna borrow at 20% because no one else will lend to me, my business is so new, but I'm gonna make 100%, I'm gonna make 200%. So in this instance, these entrepreneurs are playing this gamble, I don't suggest you do it, saying, hey, well, I'm borrowing at 20, I'm gonna make 100. But is that you? If you're going to a nine to five job, if you have a fixed salary, how likely is it that you're ever gonna make 20% returns on your salary? Never, never, never. So credit card debt, it's the easiest way to get into debt. You know, I'm not Dave Ramsey here saying, you know, pay off your credit card debt. It's too easy and the rates are too high. There is no other place on planet Earth that you're gonna go out and find 20, 24% with daily compounding like that. Careful with the devil in your pocket, that's your credit card. My opinion is any kind of loan is better than credit card debt. Go and find a personal loan. There's companies that offer personal loans. Borrow against your stock portfolio. If you have some stock, you can borrow against the value of the portfolio. I talked about this in the beginning of the video. Your house, your car, you can borrow against these assets if you're not already. Borrowing from mom and dad is preferable to running up a credit card debt. And I'm not kidding, going to a pawn shop and pawning off your stuff is a lot better source of capital than going and running up credit card debt. The truth is, you know, you take your watch and you give it to the pawn shop and they give you 1,000 bucks, whatever, for it. If you don't make up the money, well, they keep your watch, but you don't go into debt forever. So even the pawn shop is preferable to running up credit card debt. In fact, everyone thinks student loans are the biggest challenge here. Student loans are annoying. You look, you say, ah, man, why do I have to pay off this huge bill? You know, I'm working hard. I'm never gonna make enough wealth. The truth is, your student loans are probably fixed at a far lower interest rate than your credit card. Let's use an example. Your credit card is probably 20%, but your student loan is five or 7%. So why are you worried about your student loan? I mean, it's symbolic, I get it. You wanna pay off your education. You know, it might be a bigger number altogether, but the truth is, the interest rate is often a lot lower, and right now, they forgive your loans every once in a while. This would be the last thing on planet Earth that I'd wanna pay off if I have a ton of other debt in other areas with a higher interest rate. A quick moment from our sponsor, the Five Day Entrepreneur Digital Guided Course, nicholascrown.com. In five days, you will learn how to think like an entrepreneur. You will take your first step at breaking ground on a business that's gonna change your life. Check it out at nicholascrown.com. Back to the episode. All right, so all this wasn't to scare you. This is to get you educated on how debt really works and how we think about it. So what can you do about it now that you know this? Okay, fine. You make a list and you check it twice. This is how we get ourselves out of debt. We actually need to put all of our debts into a list. Now, this might take a few minutes for you to do. Probably would take five to 10 minutes. It's credit card debt line one. You know, maybe it's your car payment. Maybe it's your student loans. Maybe you owe Uncle Tony something, right? Put everything into a list. But here's the trick. Don't sort the list by the total amount of debt. Maybe you owe 60 grand to University of Awesome, right? Sort your list by the highest interest rate. And something tells me that the University of Awesome, maybe you're paying 5% to pay that loan back, but your credit card is probably gonna be at the top of the list. So great, you've got this list. What do you do? You pay off the list in order. Highest interest rate first, all the way down to the lowest. Now, you might see a huge number here and it might sort of scare the hell out of you. The truth is, you still have to go in this order. Here's the trick. Important note, this is key. Don't be tempted to pay off smaller loans with a lower interest. You gotta tackle the higher interest rate stuff first. No, it doesn't count to clear it off your plate or oh, well, you know, I owed this 1,000 bucks here and I just wiped it clean. That doesn't matter. It's all about the interest rate. This is the stuff that is bleeding your financial future dry. Start with the highest interest rate and start paying down the list. Now that you've got a plan to tackle your debt, let's start using it as a tool. Let's use debt to make more money, okay? Let's think about debt like rich people, okay? Borrow cheap and buy assets. I'm sure you've heard this a million times, but nobody's explained to you what that actually means. Okay, if you work in a salary role, borrow cheap and buy assets means nothing. This only applies if you're an investor or an entrepreneur. You might be a part-time investor or a part-time entrepreneur, that's okay. Now that you know this, the more successful you are, the cheaper you can borrow. And you're saying to yourself, wow, this doesn't sound very fair, Nick. Well, remember back to the beginning? If the interest rate is an approximation for risk, well, the more successful person with the bigger track record of making more money and paying loans back is gonna get a lower interest rate so it's cheaper to get the capital you need to go and take on the projects. Now, here's how rich people think about debt. It's a game of borrowing cheap and lending rich or buying an asset that pays you more than the interest rate you're paying to the bank, plain and simple. This is how you buy a property at 5% and you go and you make it all beautiful, you refinish the floors and you get some nice tenants in it and you find that you're earning 8% yield on that property. Well, guess what? You've just made 3% profit and you take that and you stick it in your pocket and whether you call that passive income or not, that's up to you. But this is how you're borrowing money, you're buying assets and you're making that spread or that margin. But let me push this a step further. You shouldn't be looking at these tiny margins, I don't know about this rental arbitrage game, that's not my game. You should be looking for fat margins. That means looking for opportunities where you can borrow at 5%, 6% but then go out and earn 15, 20, 30%. How do you do that, Nick? You do that by building a business. Whether that means you start it from scratch or you go and you buy an existing business, this is how you get those chunky returns over time. This is how rich people use debt to go buy car washes, they go buy companies, they go buy more stock that has a dividend yield that's paying them a lot more than the money they're borrowing. This is the game of debt. So how does this all fit together, Nick? Okay, you said you were gonna make it easy. Well, start looking at debt as the cost of capital. Basically, how much interest you need to pay to kick off a project, an investment. Start a company, buy a company, whatever it is. And then all you're thinking about is, I borrow here, but I earn this on the other side and here's my margin. And if you can't out-earn the cost of the capital, you don't do the deal. See how all this works? So make sure to pay off your highest interest rate debt first, get your hands on some cash, and if you've got a project that you want, maybe you wanna borrow some money, estimate the earning potential on the other side and then use debt like a rich person. As usual, always more to learn at nicholascrown.com. Tons of resources, tons of awesome stuff. I hope you enjoyed this video on debt. Let me know what you think in the comments and I'll see you soon.