Many people think of debt exclusively as “bad,” as a liability, when it also can be leveraged for financial growth. The fact is that business loans, personal loans, and even credit cards can be used to one’s advantage, if employed the right way. Here are smart ways to use debt to build wealth.
Debt is often viewed, generally due to lifelong conditioning, as something to be avoided at all costs. However, when it is approached practically and strategically, debt can be a formidable tool for investors and others for producing generational wealth and gaining financial success.
Having said that, debt is basically defined as a financial obligation to a financial institution or loan holder. “Bad” debt generally includes consumer debt, speculative loans, and margin loans.
When done responsibly, employing debt to build wealth can be a wise financial move. By using debt to invest in assets that appreciate, investors can prospectively gain better returns and reach their financial goals faster.
For example, there are certain types of debt, such as a mortgage used for a rental property, that can help generate a positive net cash flow and, over time, heighten assets’ value.
Non-consumer debt, also referred to as “good” or business debt, can be strategically employed to fortify one’s financial position.
Then there are collateralized loan obligations – CLOs — that are single securities that are backed by a debt pool.
There are various types of debt, each with their own potential benefits and risks. It is important to understand the primary kinds of debt and how they can be used.
Depending on one’s risk tolerance and near- and long-term financial goals, there are a number of approaches one can take to use debt to build wealth – while one is in debt:
There is a difference between investing with debt and investing in debt. The former means using existing personal debt to grow wealth, while the latter generally refers to debt investments made in collections of private or corporate debts and can include a variety of debts.
For example, the leading alternative investments platform Yieldstreet, on which nearly $4 billion has been invested to date, can help investors gain exposure to offerings in which one can invest in debt. Because debt investing provides exposure to varying types of securities, it helps with diversification, which is vital to avoiding big losses. In fact, a diversified portfolio is key to long-term investing success.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Investors and anyone looking to optimize their financial portfolio can use debt as a useful investment tool to drive financial growth, but they must be practical and savvy about doing so. Make certain one’s strategies are aligned with financial goals.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.