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Top 10 Ways on How Debt Can Generate Income 

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how debt can generate income

The average American is used to being in debt. Almost naturally, everyone considers debt as something bad. If you’re in debt, you must be broke and bad at financial planning. But depending on how and why you borrow money, debt can be helpful and powerful.

‘Good debt’ is using borrowed money to create passive income streams to build real wealth for you. Keep reading to know more about what to do with debt to help you instead of hurt you.

Good and Bad Debt: What Are They and What’s the Difference?

Debt is money borrowed from someone else. But it’s good or bad depending on how it’s used. Debt can be ‘bad ’ when consuming it for short-term use. Credit card debt is the most common type of bad debt. Because the interest rates are so high, it is seen as bad debt. Personal loans to buy expensive cars can also be another example of bad debt.

But debt can also be ‘good’ when you’re using it to make more money in the long term. It’s when you borrow money to build a business or go to school to upgrade your skills. It’s what you call “making your money to work for you,” also known as investing.

What Are the Top 10 Ways to Use the Power of Good Debt?

  • Consolidating Bad Debt

If you have bad debt, you’re paying way more interest and fees. Read Payday Loan Interest Rates By State to know how much you’re paying if you’re not taking care of bad debt.

Increasing your low-interest loan ( like a mortgage) and using the extra money to pay off other bad debt can be great. Your loan payments may be the same, but you’re paying less interest.

  • Boosting Your Savings

Many people like to keep money in a savings account as “emergency” funds or a “buffer,” which makes them feel safer. In reality, keeping this money in an “offset” account would be wiser. Such an account links to a low-interest loan like your mortgage. You will make more money after taxes, and you will also be able to pay off your home personal loan faster.

  • Enhanced Cash Flow

Keeping track of cash flow is the key to reducing bad debt. The goal is to reduce interest payments. Make monthly payments to your high-interest loans more often. Pay more each time. Put your entire paycheck into an offset account. Or, use an interest-free period on a credit card to pay for daily expenses without paying any interest.

  • Creating Wealth Passively

Once you’ve paid as much bad debt as possible, it’s time to start making good debt. Use debt to build wealth by investing. Let the growth of your investment pay off your debt more than the cost of keeping up with the debt.

Investing in properties or shares is one way to build wealth using debt. Get the extra money by taking out a margin loan or borrowing against the value of your home.

  • Using the Lump Sum Advantage

Sometimes, you may get a large sum of money, like a bonus or an inheritance. Use this to pay off bad debt or consider putting more money into your retirement fund.

  • Recycling Debt: Getting More Good Debt

As you pay off your low-interest loan, use the equity you’ve built to invest in stocks or other properties. This is called “debt recycling,” It turns bad debt into good debt that can make you money and help you repay the loan.

You can also get tax breaks or make some of your payments tax deductible. You can also put any extra money into your low-interest loan to pay it off faster and save on interest.

  • Investing in a Shared Fund

With a managed share fund, you don’t have to take out an investment loan yourself. But, you can still enjoy the “gearing” effect of borrowing to invest. A fund manager borrows money (at wholesale rates) on behalf of investors like you to invest and make a profit. You then share the profit with your co-investors according to your fund contributions.

  • Increasing Your Debt Tolerance

With a managed share fund, you don’t have to take out an investment loan yourself. But, you can still enjoy the “gearing” effect of borrowing to invest. A fund manager borrows money (at wholesale rates) on behalf of investors like you to invest and make a profit. You then share the profit with your co-investors according to your fund contributions.

  • Peer-To-Peer Lending

P2P lending is a traditional financing alternative. Instead of a bank, borrowers find individual investors/lenders like you. This lending method lets you lend money to a person or company for a price (interest payments, service, penalty fees, etc.).

  • Investing in Your Skills

Using loans to develop your abilities and skills is always a worthwhile investment. Upskill yourself and pay off your debt with money that will be worth more in the future. Education can also increase your earnings, so you can pay off student loans more quickly if you plan.

Conclusion to: Top 10 Ways on How Debt Can Generate Income

Consolidating Bad Debt
  • Use a loan to settle the inefficient debt
Boosting Your Savings
  • Redirect your loan proceeds to a high-earning offset account
Enhanced Cash Flow
  • Reduce interest payments with a smoother cash flow
Creating Wealth Passively
  • Invest loan proceeds to make money
Using the Lump Sum Advantage
  • Use loan proceeds to pay things in bulk
Recycling Debt: Getting More Good Debt
  • Use loan proceeds as capital to get more good loans
Investing in a Shared Fund
  • Take advantage of sharing a fund to achieve significant gains
Increasing Your Debt Tolerance
  • Improve your debt-to-income ratio and grab opportunities to make more money
Peer-To-Peer Lending
  • Lend to someone in need for a fee
Investing in Your Skills
  • Improve your abilities and skills to make yourself more valuable and earn more

The key to making money using debt is knowing how to do it right. Turn any financial situation into an excellent opportunity to improve your finances. We have summarized the top 10 ways you can transform good debt to help you below.

But if you need more personalized advice, seek out investment advisory services. MoneyZap also has professional information on this matter. To read more on this topic, check our top list of Loan Relief Services in 2022.

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Frank is a graduate of the Master's program in Economics Sciences. He has been passionate about writing in the financial niche. He enjoys discovering new ways to improve personal wealth and sharing them with his readers. In addition, Frank likes to travel and play board games.

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