– [Ryan] Alright so in this video what we’re going to talk about is debt. Is debt good or bad? Should you use it? When I grew up I was
taught debt was really bad, you should avoid it, you
should pay cash for everything. And I believed that until I was like 27 years old until
I really started to see success with my business, and then I came full circle on this. I have a friend and a
business partner now, his name is Clement who had me think about this
a little bit differently and you might have heard the phrase “There’s good debt and there’s bad debt”. That comes from Rich Dad
Poor Dad by Robert Kiyosaki. We’re going to talk a
little bit about that and the difference in
how to identify that. So to illustrate this just for a second, let’s assume that you’ve got a 5%, you’ve got 5% money out there. Whether that comes from
a loan from the bank, or you have a private investor, or this is what you pay
for your college debt, or whatever the source of the debt is. Or if you’ve got a really
good credit card that pays 5%. If so, tell me what credit card that is. So– what this just assumes– Alright, so if there’s money coming in from outside sources, from The Cloud. This is from banks and investors… The question is not “Do
I take the 5% loan?” The question is “Where
does the 5% loan go?” What do we do with the capital from here? So, if we have a business and that business as a result of having capital allows us to release a new product, and that product is going to have a 30% profit margin and it’s going to grow over
time; accelerate sales. And that capital is what allows
us to release a new product, that could literally be 100% return. In fact, when we break down the reason why businesses
grow faster than others, it comes down to their ability
to turn over inventory. So the faster you can turn over inventory, the faster your business grows. And by that I mean sell through inventory and replace that inventory quickly. That requires cash. Sometimes it requires
cash that you don’t have. Which is where this comes in. So, if this is a 100% return, and I know that sounds
silly to some people but in business it happens all the time. I’m going to take, uh, I’ll take $100,000 and I’m going to take that 100K put it into a new product in my business, and at the end of the year
I had $200,000 in profit. So that’s 100% return, right? So in this case, you have spent $5,000 to make $100,000. So in this case, is debt good? Or is debt bad? In this case, debt really good. We’re good here. I want to take this money all day long. ‘Cause I know exactly what to– where to put it in my business so that it gets a higher
rate of return than 5%. We could also look at this
in a case of real estate. So if we borrow $100,000 to put into a house that has a 10% return, and that 10% return comes from rent. And it comes from– If we pay $800 a month to pay this back over 30 years and we’re getting $1,000 in rent, we’re getting $200 in profit. We’re also paying back this debt and the value of the house is
going up, is this debt good? 100%, we’re making 10% on our money, plus it’s going up in value and we’re paying off the debt over time. So in that case, debt really really good. Here’s where it gets messy. What most people think of debt they think of borrowing money to get rid of it. And this would be credit cards, (writing on white board) or would be college. Now, here’s where this is different. If you’ve got college debt because you went to
college for general studies and you’re hoping to get a degree. Is there a clear way that
you can deploy that 5% in your education to earn more over time? As opposed to a trade school where if you’re going to borrow money to go to this trade school and as a result you know
you’re going to make 65 to 85 grand a year for
practicing that trade, now we’ve paid for the debt. We’ve paid for the 5% loan, we know exactly what
the ROI is going to be and we can make this decision. Whereas what most people
do, what most kids do, and the government incentivizes which is just a ridiculous idea, is they say: “Just take out debt, go to college, you’ll figure it out.” And you have these kids who graduate with $100,000 in debt
and they can’t find jobs. We should not be incentivizing that. We should not be encouraging people to take on that kind of debt. There’s no ROI to that. Zero. Now, here’s where it gets interesting. Especially if you are an
entrepreneur or an investor. Taking out credit cards or taking out 5% debt to spend on cars. This is a really bad idea if you are just going to spend the money. But recently, I bought a new car; a Tesla. It was $100,000 car. And I took out a loan for it. Now what would I do that if I’m just spending it on something that some people would call frivolous? Well I bought it on debt
because I got a 2% loan. So at a 2% loan, what this allows me to do is it frees up $100,000 in capital. $100,000 in money that I would have spent on the car is now– What am I going to do
with that 100 grand now? I’m going to take that 100 grand and I’m going to put it here in something that
actually creates a return. I used that money to
buy a rental property. So I’m from Cleveland, Ohio. I bought a house for $100,000 in North Olmsted, Ohio. And that is rented out,
it creates a return, it’s going up in value, and what did that do? It allows me to pay this back no problem. And I’m actually getting a return on the money that I freed up. So I’m making, we’ll just say it’s 10%, I’m paying 2% and I have a car. So, we get a three-for here. Instead of spending the money frivolously, or wasting it on what Robert Kiyosaki would call “doo-dads”, Took the money, borrowed
instead of spending it, bought the car. I’m now making payments on the car that is paid for by the house. (writing on white board) So, I got a free car. Instead I bought a house. I have profit. And I get to have my house,
my car, and eat my cake too. That’s a really really good use of debt. Here’s– now I’m going to
make it super complicated now. What’s really exciting about this, is that this, as this gets paid off as the house gets paid off, as the car gets paid off, if you want to make it super complicated now we’ve got value that
we could borrow against. We could literally
borrow against the house, again at 5% and go buy another house. This is what we call a multiplier. I have a podcast about
this on Freedom Fast Lane. You could probably Google
“Freedom Fast Lane Multipliers” it’s called Only Invest Multipliers. A multiplier is something that if you have capital, take that money and put it into something that’s going to have
an exponential return. So what that might look like is as I have an investment, I can borrow against the investment at an interest rate that allows me to put it back into the investment and it can actually multiply and compound. Which is really exciting and kind of sexy. So if you’re interested in
making is super complicated you can look up that podcast. So if we were to totally simplify this, the question of debt comes down to the difference between the ROI
you’re going to make with money and the ROI you’re spending on paying that money back. So if we can borrow– Act– Here’s a fun story. My mentor, my buddy Clement before… So at www.capitalism.com we train people to start physical products, businesses, as a way to be an entrepreneur. So we have free training classes and stuff that you can sign up
for that’ll show people how to start physical
products, businesses. And there’s a site that some people use to fund their businesses called I think it’s UpFund. And UpFund charges like 20%. 20% to get a loan from them. Which people say is
crazy, that’s exorbitant, it’s like putting it on a credit card. But, if that 20% goes into a product that
going to make 100% return, I’ll make that trade all day long. So the question is not, is this cheap money or expensive money? The question is, compared to what? Because if we could be
growing our business by 100% per year and we’re not because we’re not borrowing then we’ve actually lost all
that growth that we would have. Not to mention the customer
base that we would get and all of the individuals
that we could then market other products to. So in that case, debt is a
really really good thing. But is all based on what we do with it because if we’re spending it versus putting it somewhere we have
a higher rate of return, that determines if debt
is good or if debt is bad. This is why people like Donald Trump use a tremendous amount of
debt to grow businesses. They keep their capital, invest their the debt into building other things, and that’s how they
become super uber wealthy. And that’s why debt is not good or bad. It’s about what you do
with the debt that matters. Hope you found this video helpful. If so, share this with an entrepreneur or somebody you know who
would find value in it. Make sure you’re subscribed
on Youtube and on Facebook. And we’ll see you at www.capitalism.com. Thanks for watching.