In a recent short video on YouTube, I showed a clip of Robert Kiyosaki explaining how to become rich. He explains in the video how you are not taxed on debt; that money is created via debt; and that the rich use debt to buy assets. In this article, we are going to take a closer look at these three points. Hopefully, by the end of the article you will have a better idea of how to build wealth for yourself and your family.
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1. Debt isn’t taxed
When you take on debt, you aren’t taxed on it. Debt isn’t income; you owe the money to whoever you borrowed it from, so there is nothing to tax. This allows you to build wealth more effectively. If you can take money out as debt, rather than by selling an asset, you don’t create a tax liability. The rich understand this and use it to their advantage all the time.
You can do this too. Buy Refurbish Refinance Rent (BRRR) deals are a great example of this. If you refinance a property, the money you get back is debt. That debt is therefore not taxed. You can use that money to re-invest and grow your property portfolio. If you were to sell the property rather than refinance, that would create a capital gain and thus be subject to tax.
2. Debt creates money
Some currency is created by the central bank, but most is actually created by banks lending out money. The Bank of England puts it like this: “Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans.” They go on to explain, “…if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.” It may be surprising to some, but this is how currency is brought into existence.
Understanding this means realising that the economic system we live in is based on debt. Learning how to use debt within this system is one of the key differences between the rich and the poor. The banks and the system want to lend out money, and those that use this to their advantage build wealth.
3. The rich buy assets, the poor buy liabilities
Robert Kiyosaki defines an asset as “something that puts money in your pocket” and a liability as “something that takes money out of your pocket”. The mainstream opinion is that the house you live in is an asset, but Kiyosaki disagrees. The house you live in costs you money, it doesn’t give you money. Real estate you rent out, on the other hand, is an asset, as it pays you to own it.
Understanding Kiyosaki’s definition of an asset is key to using debt effectively. If you can use debt to buy assets that pay for themselves and pay you to hold them, you can use this knowledge to become rich. This simple concept has helped many people become extremely wealthy and now you know it too!