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Here’s what I’ve learned in three decades as a CPA, author, and financial advisor: The richest and poorest Americans have the most debt. The rich can stay rich, but the poor can never get rich.
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The reason is simple: the smartest rich have “good” debt, while the majority of Americans are plagued by “bad” debt.
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You may have heard these terms before. You may also find that mortgages are often considered “good debt” while credit card balances are considered “bad debt.” Of course, like everything in life, it’s a bit more complicated.
When good debt can be bad
Ask someone who is struggling to pay off their mortgage if they consider it “good debt.” It doesn’t bode well if you miss payments, incur late fees, or even face foreclosure. For the wealthy, multiple mortgages on multiple properties can make them money because they have enough cash to switch between payments and investments.
I have advised many people who bought their homes beyond their capacity because they justified it as an “investment in our future”. However, if they default on their mortgage and their credit, they don’t have a great financial future and are financially crippled because every dollar goes into that “good loan.”
Student loans are often viewed as another form of good credit because you are borrowing money now to increase your earning power later. Unfortunately, student loans are a $1.5 trillion nationwide problem because graduates haven’t done the math to see if they could actually get back the amount they borrowed.
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Lesson: Rich people always ask, “Will this debt get me more this morning?” If the answer is no, then it’s there. There is no “good debt” that leads to more debt.
When bad debts become bad debts
I’ve advised my share of professional athletes who have signed multimillion-dollar contracts — and then spent multimillions on homes, cars, and vanity startups (think restaurants with their names on them).
Experts like me advised against these purchases, but athletes usually countered with this argument: “You need to fake it until you make it.” In other words, you have to look wealthy if you want others to invest in you.
That is of course partly true. Who trusts a doctor whose office has broken windows and a leaky roof? Who wants a lawyer when you drive a rusty 1977 Ford Pinto?
Far from spending it all hoping to get it all back and then some. It’s not investing, it’s gambling.
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To get rich, you cannot skip the steps of being financially secure, financially successful, and then wealthy. Ask most self-made multimillionaires how long it took them to make their first million and the answer would be measured in years, not months.
Lesson: If you’ve spent more than you need to look successful, trust me: you probably won’t be. You’ll be stressed out by debt and distracted by juggling payments – which means you won’t be focused on the success you’re striving for.
How to use credit properly
Aside from borrowing money from the mafia or loan sharks, credit cards are often the worst form of debt. Interest charges can be as high as 20%, which means you pay $1 in interest for every $5 you earn. But you can also benefit from using a credit card here – if you use it in a disciplined manner.
It’s actually quite simple: get a bonus card that brings you the most points, even if it means a higher interest rate. Then you pay out the balance each month. Of course, many people hold balances because they can’t pay off those balances every month. However, when I delve into their finances, I find many expenses that do nothing. I’m talking “shopping therapy” that proves no therapeutics, streaming services and gym memberships they rarely (or never) use, and the aforementioned “fake it you make it” luxury items. .
Worse, many of them don’t even have a monthly budget. While polls show more Americans than ever are budgeting, one in five still isn’t. Trust me, successful wealthy people know how much they spend each month (and so should you).
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After all, wealthy people hire professionals to manage their money. You may have multiple CPAs just to make sure they have a range of expert opinions. If you’re struggling with debt – “good” or “bad” – you also need to turn to professionals.
Closing text: If you want to get rich, you need to spend some time thinking about money instead of spending money.
Howard Dworkin, CPA, is President of Debt.com, the nation’s largest one-stop shop for debt reduction. Dworkin has written two books on personal finance and founded Consolidated Credit, one of the largest not-for-profit credit agencies in the country. His focus is on getting people out of debt and on the path to financial stability, but he is also committed to giving back in other ways. Within three days of the 2018 school shooting in Parkland, FL — a mile from his home — Dworkin launched Parkland Care, which has raised more than $1 million for traumatic mental health counseling.
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About the author
Howard Dworkin, CPA, is President of Debt.com, the nation’s largest one-stop shop for debt reduction. Dworkin has written two books on personal finance and founded Consolidated Credit, one of the largest not-for-profit credit agencies in the country. His focus is on getting people out of debt and on the path to financial stability, but he is also committed to giving back in other ways. Within three days of the 2018 school shooting in Parkland, FL — a mile from his home — Dworkin launched Parkland Care, which has raised more than $1 million for traumatic mental health counseling.
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