This is part 4 of our 4 part series regarding the biggest scams disguised as wisdom in today’s world.
Scam #7: Get Out of Debt
As you’ve been reading this eBook, you may see some patterns in the scams I’ve discussed. Several of them go together, and they all come from the same mindset. Saving money, living below your means, and the scam I’m about to go into, “Get Out of Debt,” all come from one place: Being afraid of money.
Just like all the other scams, the idea that you have to get out of debt and stay out of debt to be successful is a lie, and it gets repeated because people don’t have a financial education. They simply don’t really understand what money is, how it works, and how to put it to work.
Isn’t Debt Bad?
The scams we identify are the ways the ultra-rich stay rich and make sure the poor stay poor. That can be counterintuitive, especially when some of the scams, like getting out of debt and saving money, seem like they would help you get rich. Again, they’re just scams.
The rich carry debt.
They generally carry a lot of debt. They have assets that more than make up for the debt the carry. In fact, the rich not only carry debt, they use it to get richer. The difference between the rich and poor when it comes to debt is understanding the difference between good debt and bad debt.
Good Debt vs Bad Debt
Bad debt is debt that makes you poorer, such as credit card debt, car loans, and more. This is the type of debt used to buy liabilities.
Good debt is debt that makes you richer, such as a loan for investment property or to purchase equipment for your business that will make you a return. This is the type of debt that is used to buy assets.
An easy example of good debt is my real estate holdings. By getting a loan from the bank, I can purchase a property with only a small percentage out of my pocket. I then rent that property and my tenant pays the cost of the debt while putting money in my pocket.
Business is the same as the real estate example. You have good debt that pays for itself. The cash flow of your business covers the debt and generates income. That income can be turned into more good debt to create more cash flow.
We’ve been taught to think of debt as a four-letter word. It doesn’t have to be, especially when you have the financial education to understand how it can work for you, not against you.
How Money Works for You
I have an excellent example of how the good debt concept works. Say I have $100,000. I can put it into a mutual fund, which might be better than saving it. The return on it would be a bit more than just putting it in savings, but it won’t be a lot.
However, if I use that $100,000 as a down payment on a $500,000 investment property, then I’ve actually bought $500,000 in value with just $100,000! The difference of $400,000 is good debt.
This is exactly what Kim did on a smaller scale with her first investment. She bought a $45,000 house with a $5,000 down payment, acquiring $40,000 in good debt, and she put that property to work. The tenants paid the mortgage and the taxes on it for her. Her investment property was generating a positive cash flow of $25 a month. It wasn’t a lot, but it was a start. She used the same practice over and over again, and she kept putting her money to work. Today, she invests millions of dollars using the same concept.
Today, rather than buy into the lie of scam #7, “Get Out of Debt,” I encourage you to instead increase your education and begin learning how you can make good debt work for you.
Scam #8: Invest Diversely in the Long Term
The scams I’m writing about in this eBook are the “rules” the ultra-rich want you to follow that will keep you an employee and keep you poor while they continue to get richer.
The reason why so many people buy into these scams is because some of them, like working harder and saving money, used to be viable. If you followed them, there was a reward, but not anymore.
As we’ve seen in other scams like paying off debt, living within your means, and saving your money, the scams I’ve identified keep you from truly putting your money to work. They keep you from turning your money into more money. In other words, they keep you poor.
The Investment Illusion
If there’s anything to be learned from the financial mess of the past five or six years, it’s that nothing is guaranteed.
It’s worth noting that financial planners didn’t exist until about forty years ago, when people were forced to take control of their own retirement funds through vehicles like the 401(k). Financial planning is an industry created by the banks to make money off the financially illiterate. It takes only thirty days of training to become a financial planner. You have to go to school for more than a year just to become a massage therapist.
Nearly every financial planner will tell you that in order to be financially secure, you must diversify.
By this they mean to invest in stocks, bonds, and mutual funds. Unfortunately, this is not true diversification. Rather it is diversification in only one asset class, paper assets—the class where banks make big money in the form of fees. True diversification, which is investing in the four asset classes of real estate, business, commodities, and stocks, is ignored.
The Diversification Trap
But, you say, my financial planner helped me plan wisely. We invested in lots of different things, so that if one company’s stock or one mutual fund takes a hit, there are others that will go up. This is one of those scams that makes sense on paper. Of course, the more spread out you are, the more protected you are from losing money. Except for the fact that everything you’re invested in is still on paper, it’s based on the same fragile economy and the same investment model. When the stock market goes down, it goes down everywhere, not just in certain places. Investing in Microsoft and McDonald’s won’t make any difference if the market tanks and everything goes down. Widely investing in different mutual funds spreads that risk around even more, but the risk is still the same and the hit will be the same when things go south.
True diversification is investing across different asset classes, not different stocks. This holds true with any of the asset classes. If I’m invested in condos, apartments, and houses, my portfolio looks diverse, but they’re all still real estate assets. So I have real estate assets, commodities assets like gold and silver, business assets like my companies, and yes, I have some paper assets as well.
The real issue here is that by buying paper assets at all, you’re putting control of your money in someone else’s hands. A CEO makes a bad decision, and you’re left holding the bag for his mistake when the stock drops. The only control you have over paper assets is to sell them. Holding on to them, you’re just playing a waiting game and crossing your fingers. It’s even worse if you put those paper assets into a 401(k), you have even less control, they’re locked in, and you’re penalized for
taking those funds out or borrowing against them.
True diversification requires financial intelligence, which comes from financial education. If you don’t have the desire to increase your financial intelligence, then by all means continue using your financial planner and investing in only paper assets, as those investments are set up so that even a monkey could do them. If, on the other hand, you want to be rich, I encourage you to ignore scam #8, “Invest for the long term in a diversified portfolio of stocks, bonds, and mutual funds,” and
instead increase your financial education and begin working towards true diversification.
Have we been financially brainwashed? I believe we have. The primary reason why most people cannot see the truth is because we have been financially programmed to mindlessly repeat mantras that cost us our wealth.