The saying “who pays his debts, gets rich” might not be as true as that or at least not always. We have to distinguish between good and bad debts.
In fact, the debts we incur to pay for the goods and services we enjoy ourselves are debts that cost us money. So use the credit to pay for clothing, travel, current expenses or even mortgage for the single-family home we live in (unless in this case you used the borrowed money on the accumulated capital of your house to make it grow ), are real debts.
Borrowing to buy an income home, to start a business
On the other hand, borrowing to buy an income home, to start a business, to buy tools or machinery to produce goods or services that will earn you, is an investment and should earn you money. According to the Larousse the definition of the latter is: “the decision by which an individual, a company or a community allocates its own resources or borrowed funds to the increase of its stock of productive assets”.
So when you buy a mortgage to buy a bungalow where you live you do not make a real investment according to this definition. Yes, there will be an increase in the value of your property and you would pay rent anyway, so you probably make a better choice than staying in housing but it is an expense, you live there.
However, the income house that you buy, it falls into the category of investments. You borrow to acquire something that earns you. You make your money work, as the saying goes. Your debt is used to increase your stock of productive assets .
We all know it takes money to make money
To borrow to make money is a good debt. Borrowing for expenses is bad debt. Once the TV or boat purchased, you will have to pay interest and repay capital on your credit but there will be no return on investment because it is not an investment unless you do not rent the boat and it pays alone and even allow you to make profit.
Because, in fact, buying on credit equipment that will allow you to be paid for your services is a good debt. In theory, at least. If you make bad choices of investments, it’s something else. And if it is a good debt, it may not be necessary to repay it quickly … If you have used the credit wisely and you end up, with some liquidity, you have several options including paying your debts. But if with this liquidity you can invest in something that will earn you more annually than the interest you pay on your credit, the calculation is done quickly. Even if it’s a small difference, but it pays you back, it says there are no small savings.
Buy an income-generating house
Of course, this column does not suggest that you live with friends and buy an income-generating house or tighten your belt excessively to buy only things that will earn you money. What is at stake is to limit the credit of expenses and to grow rather “his stock of productive assets” … if necessary by borrowing.
In other words, do not hurry to pay off debts that you have incurred for the purpose of making your assets grow if you will then miss the money to continue to grow it. Rich people are in debt too, rich countries are in debt, some of them more than poor countries. The difference is in the use of debt. Less spending, more investment … wise of course.
I suggest our borrowing capacity calculator to help you determine if you are in a good financial position to become a homeowner.