4 Debt Hacks (to Take Advantage of Debt)

While most people talk about all of the negatives of debt, there are ways to take advantage of debt that you can use to improve your financial situation.

If you’ve read our post about if debt is good or bad, you’ll know that debt isn’t really good or bad but how you use it can be. 

You can use debt and waste money or you can use credit and make more money or even save money.

Here are some of the ways you can take advantage of debt:

• Credit Card Rewards
• Real Estate Investment
• Funding Your Education
• Establish and Build Your Credit Score

Everyday, businesses small and large take advantage of debt to increase their success. 

You can do so too in your personal life. 

Credit Card Rewards

Probably the easiest way to take advantage of credit is to use credit cards that provide rewards for spending.

Most credit cards come with rewards already built in but there can be wide differences in the rewards offered.

Some credit cards reward you with a percentage of cash back.

Other cards will reward you with points that are cash-like that can be used for various rewards like travel and products. 

There even are miscellaneous benefits too that are offered by companies to entice you to use their credit cards. 

We’ve seen a few interesting rewards. 

There is supplemental cell phone insurance when you pay for your cell phone bill with your credit card.

We’ve also seen a card that will reimburse your global entry or TSA pre-check fees.

Typically, the rewards are a small amount in the scheme of things but still worth enough to make you a little bit of money. 

What’s great about taking advantage of credit card rewards is that you don’t actually have to pay interest to receive the rewards.

You can simply pay for you purchases, receive rewards, and then pay off the balance every month.

Real Estate Investment

Do you own you home or want buy a home one day?

If you do, you probably had to use a mortgage or will have to use a mortgage to buy your home. 

Many people also use mortgages to buy real estate property.

The idea is that with the real estate property you can generate enough revenue and appreciation to offset the costs of owning the property, including the interest expense of debt.

Debt can allow you to achieve even greater returns than with just your capital.

Let’s look at a “simple” example:

You have $75,000 and you’re looking to invest the money. 

If you put it into stocks and you can expect around a 5-10% return on average each year. 

You could also buy a small home for $200,000 with a $125,000 mortgage. 

The mortgage payment is going to be around $600 and we’ll assume the additional expenses are going to be around $250 each month. 

Let’s say you can rent the home for $1,000 a month which will grow at 2% each year as well as the value of the property. 

Essentially, rent and the property value are growing at the rate of targeted inflation. 

After 30 years your $75,000 stock market investment will be around $571,000 at a 7% average return. 

That probably includes a dividend of around 2.5% or $14,000. 

With your house purchases after 30 years, the home would be worth around $360,000 and your annual income would be around $16,000. 

But, you also made money in every year of renting the house that comes out to a total of $149,000.

And, if you invested the profits in those same investments, returning 7% each year, it would come to a total of $390,000.

So, in total you could have invested in the stock market at get a 7% return, turning your $75,000 into $571,000 and a $14,000 dividend each year.

Or, you could have bought a $200,000 home and rented it, turning your $75,000 into a home worth $360,000, net profit of around $16,000 each year, AND $149,000 in profits over the 30 years which, if invested, would become $390,000.

Here is a table to break down everything:

You’re probably thinking, this is a ridiculous amount of math and just too confusing.

At the end of the day there are a lot of assumptions in there that might not pan out too.

But, we want to provide an example of how you can leverage your money by taking out debt to fund purchases.

By using debt, you can essentially invest more, partly through capital and partly through debt.

For the investment to be worth it, not only should you be able to pay off the loan and earn a return, but you should make more than if you invested in something else like the stock market.

From the example above, the rate of return is 7% for the stock market investment while the rate of return for the home purchase is around 9%. 

You were able to obtain that extra 2% each year through the use of debt. 

Also, you need to cautious about risk when choosing investments.

Taking out debt does increase your risk and buying a house versus investing in the stock market has different types of risk too. 

Funding Your Education to Obtain a Better Salary

A lot of young people in the US, ourselves included, have taken out student loan debt to fund their higher-education. 

Some people have been greatly burden by the amount of debt they have taken out, unable to repay the loans.

A lot of this is due to skyrocketing costs of college education while the median salary has grown very little, if at all.

There are also some people who’ve funded an education that doesn’t match their career salary expectations. 

And, it makes sense given that most of us have never been taught about money or debt at that age.

But, there are cases where you can fund your education and obtain a job that allows you to repay the loans.

We know because we did it.

Well actually we did both.

Once, funding an education that resulted in a low paying job and then funding a master’s degree that resulted in a high-paying job. 

If you’re thinking about student loans to fund your education, we suggest you create a financial plan.

Include how much money you’ll have to take out in loans and how much money you’ll make when you start working. 

Federal student loans typically start on a 10-year repayment plan so its a good idea to map out how you think your salary will grow over those ten years. 

And, it’s okay if your financial plan is totally wrong.

Most financial plans, even in business, can be completely wrong. 

But, it will help you to avoid the big mistakes, like choosing a college tuition that doesn’t match the earnings expectation of your field of interest. 

Establish and Build Your Credit Score

Another way to take advantage of debt with out paying interest!

These are our favorite because we hate interest. 

The only time interest feels okay is if you expect to earn money now or in the future to offset it.

But, you don’t actually have to take out debt to establish a credit score and build credit.

What is a credit score?

The Consumer Financial Protection Bureau describes it as a way to predict how likely you are to pay back a loan on time.

The scoring model uses information from your credit report to create your score. 

And, this score can be used from everything to deciding how much a bank will give for a loan and how much they will charge you in interest to a landlord deciding if they will rent you their home or property.

But, if you don’t have credit or access to credit, you essentially don’t have score.

That’s because they have no information to go off of in your credit report.

But, if you open a credit card, you’ll begin to have a credit report.

What are some of the things in a credit report that companies look at and use to calculate your score?

• How much debt you have outstanding
• How much debt you have access to – your credit limits
• Your payment history

So, if you open a credit card and start making purchases you’ve hit all three of these important items.

You’ve established a credit limit.

And, if you make a purchases using the card, you’ll have a credit balance.

Last, when you pay off the balance you will establish that you pay in full and on time.

As long as you pay off your balance each month, you will not have to pay any interest.

The biggest benefit of establishing and building a strong credit score is that you’ll likely pay less on future debt.

Final Thoughts

Debt can be nasty and really screw up your life.

But, if you want to become wealthy you have to be able to know how to take advantage of debt.

There are plenty of disadvantages of debt that can create problems so you do have to be careful. 

If you can get in the mindset that debt is a tool for you to take advantage of, you may be able to speed up the process of reaching your financial goals. 

It can be advanced as buying real estate or even starting you own business.

Or, it can be as simple as building your credit score and getting some sweet credit card rewards.