MANAGING DEBT LIKE THE WEALTHY

 Debts are not necessarily a bad thing. In fact, just as they say diamonds are a girl’s best friend I am convinced that debts are a rich man’s best friend. This is because every wealthy man has at one time or the other expanded or grown his business empire by leveraging on debt financing. It is virtually impossible to have enough capital to expand business at every level. This is even why banks were established – to provide access to capital to funnel growth.

The truth is that everybody owes and everybody will owe at one time or the other. When you consider that even companies and governments owe then no one is exempted from debt. However there is a marked difference between the rich and the poor’s attitude towards debt. The rich manage their debts while the poor mismanage theirs. Proper management of debts entails:

Firstly, investing borrowed funds into ventures that will generate profitable returns. Wealthy people borrow to invest in opportunities that they have researched on and seem proven to generate profit in time for them. The poor also borrow to invest but have not done their due diligence to get a thorough understanding of the opportunity thus getting their fingers burnt. I think Warren Buffett, one of the richest men in America put it succinctly when he said the first law of building wealth is not to lose money and the second law is to obey the first law. Wealthy people have a “never lose money” mindset, especially when they use debt.

Secondly the wealthy seek for ways to speed up their repayments in order to reduce the burden of interest. For example starting out a business venture with debt financing, and later on trying to bring in partners to take up equity and use their funds to repay down the loans is a good idea. They usually explore all avenues and focus on paying their creditors as quickly as possible. This helps to reduce some of the debt burden.

Now many times business performance does not go according to plan, losses may occur. When this happens the wealthy do not try to dodge or run away from their obligations, instead they face the music and strive to see if they can renegotiate terms or seek alternative options to finance their facility. The poor man’s first inclination is to flee and hide himself away which sours the relationship with his creditor. Managing debts means accepting responsibility for your actions and taking steps to correct unwanted consequences.

A study of the rich also highlights their approach not to put all their eggs into one business basket. Even though they are not risk-averse, they always seem to have several initiatives and opportunities in the pipeline at all times. The drive is to acquire multiple streams of income so if a new stream does not go according to plan they can clear up their outstanding from another stream and cut their losses. This is precisely the reason why banks fall over themselves to finance the wealthy – they seem to always have a way to pay back. Those outside the wealth league put all their eggs in one basket and when the basket falls they lose everything and are highly unlikely to possess a backup plan.

Finally successful management of debt also includes shopping around for the best terms and rates. They usually typically approach more than one financing institution and compare terms and offerings with a view to getting the best deals in their favor. The non-wealthy would rather stop with the one opportunity he has found without venturing to look out for more favorable ones.The fact that if he calls the bluff of the financier he may not find another, weighs heavily in his mind. He has no choice but to accept offers from the only bidder.

Start today to become more adroit and adept in your approach towards debt financing. Granted wealth is made up of stages and is likened to a journey, however take steps to try to implement these steps if you desire to make wealth. Debt is not evil! Debt is actually a good thing if you manage it wisely!