When most people hear the word “debt”, their minds immediately jump to stress and financial ruin. But for Ken McElroy and Robert Kiyosaki, debt is far from a dirty word. Unlocking the power of debt is the secret ingredient to their staggering wealth.
In a recent YouTube video filmed aboard McElroy’s private jet, the real estate mogul and the celebrated author of Rich Dad, Poor Dad candidly discuss their $2 billion debt.
Rather than expressing anxiety, they exude confidence and even joy. Their perspective on debt is radically different from the conventional wisdom that debt is inherently bad.
Unlocking the power of debt
Why aren’t McElroy and Kiyosaki terrified by their colossal debt? Because they’ve harnessed it as a tool for building wealth.
“Our job as entrepreneurs and capitalists is to figure out how do we use debt and create assets that other people reach into their pockets and give [money] to us for?” Kiyosaki explains in the video. This fundamental shift in mindset transforms debt from a liability into a potent asset.
The duo illustrates that when people deposit money in banks, it becomes a liability for the banks, who then must lend this money to balance their books. If the borrowers use this money wisely, they not only help the banks but also reap tax benefits and turn borrowed funds into growing assets.
The secret, they say, is distinguishing between good debt and bad debt. “Good debt makes you rich. Bad debt makes you poor,” Kiyosaki asserts. So, how do you make sure you’re taking on good debt?
Kiyosaki offers a critical piece of advice: avoid using personally guaranteed debt to buy depreciating assets. Instead, invest in appreciating assets that others will pay you for.
In the video, McElroy shares practical examples:
- Real estate investments: By purchasing property with a loan and having tenants cover the debt through rent, you benefit from property appreciation without shouldering the cost alone.
- Business ventures: Starting your own business can transform borrowed capital into a profitable enterprise.
- Leveraging tax breaks: McElroy financed a $10 million jet with an $8 million loan, then claimed a $10 million tax break under rules allowing companies to write off the full value of eligible assets like planes in the year of purchase.
By identifying and investing in such appreciating assets, borrowing becomes a strategic move rather than a perilous one.
Kiyosaki argues that mastering the use of debt is a crucial determinant of wealth. “Poor people always say, ‘I can’t afford it’, rather than ‘How can I afford it?’” he notes, highlighting a critical mindset difference.
Before diving into the world of debt-fuelled investing, both McElroy and Kiyosaki advise ensuring you have the right temperament and willingness to acquire specialized knowledge. Understanding when and how to use debt as a financial tool is essential to avoid pitfalls and maximize benefits.
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