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To Pay off Debt, or Create Wealth?

20 January, 2012 / by marketing

“Pay off your debt, pay off your debt!” This is what Canadians have been hearing for months and months now; and with record household debt levels, it’s no real wonder why. Yes, we have a lot of debt and yes, we need to be finding ways to continue to pay it off – and the faster the better. But is that all we should be doing? If you want to get truly wealthy, is it better to pay off your debt, or create wealth?

Well, let’s start by looking at some of the truly wealthy people we attain to be like. Did they scrimp and save, or did they do things, make things – especially things like assets? Donald Trump, the man who was once viewed as the richest man in the world (and for a pretty long time, too!) built office buildings and mostly hotels in order to accrue his wealth. And right here in Canada, Kevin O’Leary built software in his basement, and is now one of the richest men in Canada and a pretty interesting TV personality too. So did these famous folk become wealthy because they sat around eating Ramen noodles every night and paying off their credit cards? Well, that probably had something to do with it. But more importantly than that, while they were paying off that debt they were also building and creating – they were amassing their wealth!

We’re in no way saying that it’s time to head to your basement and start tinkering with anything you can find in there, trying to come up with the latest and greatest thing. What we are saying is that, if you want to be truly wealthy, or at least live more comfortably than you are now, you need to create your own wealth instead of just feeding into that of others by paying off your debt. No one ever got rich by giving all their money away.

Keep in mind that while you’re building your wealth, you may have to take on more of that debt you’re trying to pay off – so you should make sure that it’s the right kind. No, don’t go out applying for dozens of credit cards so you can charge your new wealth-creation on it. The chances are that you’re not actually going to make or invent a new product (and even those newfangled contraptions are extremely difficult to patent and sell.) But, you might build your bank account by buying an investment property. This is a great example of building wealth without going farther into debt. It can be done quite simply if you can take out a second mortgage loan on your home and use that money as a down payment. The tenant’s rent will pay the mortgage on the second property, and maybe even some on the first. You’ll be re-creating yourself as a landlord, and paying down your debt all in one fell swoop!

Another important thing to keep in mind when you’re going into debt so that you can create wealth is that the debt you take on should come with tax-deductible interest. Government student loans are a great example of this. The interest on most student loans is non-existent until graduation and even then, it’s forgiven for nine months. You’re building yourself into a professional, and the government is actually letting you borrow money for free! This is one of the best ways there is to create wealth for yourself; unfortunately, it’s one that most of us are too young at the time to realize.

The point is that we all still need to be paying down our debt; with the recent stats that we have of households holding more debt than they do income, we don’t really have a choice. But it’s not just debt we need to be focused on. We also need to pay attention to building our wealth properly, avoiding things like credit cards and using good debt such as home equity or interest-free loans. Because once you pay off your debt, you’re still not rich. For that, you need to build wealth. And you need to know how to do that the right way.