by Tyler G. Hicks from his IW$ classic book Smart Money Shortcuts to Becoming Rich
There are two schools of thought on managing a debt:
- Pay off the debt as soon as possible
- Take as long as possible to pay of the debt
Since I started with little in life because my father died when I was twelve, I had to borrow money to make money. It wasn’t until later in life that I discovered that the wealthy smart money men in this world did the same. There was a difference, of course. They borrowed money to make money because this is a wise way to expand your money-making abilities; I borrowed because I had to — I didn’t have a personal fortune to start with.
I assume you don’t have much capital and that you use OPM — Other Peoples’ Money. My experience shows that the biggest problem people face when trying to become rich is that of finding enough capital to buy a business. If they have $1,000 in cash, the kind of business they want costs $10,000, or $20,000. Then, if they borrow the money from several sources, they may have a big monthly payment hanging over their heads.
What to do?
One excellent answer is: stretch out your debts.
K-16 : Guaranteed Loan Money Kit
This robust kit provides examples of agreements you can use — with the approval of a qualified attorney — to cover cosigners, co-makers, and guarantors to enhance your credit — or that of a client — so you or they qualify for a needed or wanted loan.
4 Advantages of Stretched-out Debts
- Stretched-out debts have lower monthly payments
- The interest is provable and tax-deductible
- You have a higher net profit
- You improve your credit rating
Let’s say you buy a business on OPM by borrowing $15,000 from banks and signing a $9,000 promissory note given by the seller. Once you take over the business you find that you can pay the bank without trouble. However, the seller’s promissory note, on which you must pay $300 per month plus interest, is more difficult to pay. While the business earns enough for you to pay the $300 per month, the burden is more than you want at this time.
What can you do?
You can grin and bear it, paying the $300 per month for 30 months until the loan is paid of. This is a valid approach that is used by some businessmen. The principle is, “We’ll sweat it out now; when the note is paid off we’ll be in clover.”
I believe every businessman should sweat out several loan repayments. It’s a maturing experience that gives you greater confidence in yourself.
But suppose you don’t want to sweat out this note. What then?
The answer is: Use more OPM.
IWS-39 : You Can Get the Money: How to Finance Your Small Business Start-up or Expansion
You Can Get the Money: How to Finance Your Small Business Startup or Expansion by Robert E. Highman is the cult-classic in the world of business that few people know about, though those that do have benefitted wildly. This direct and readable excursion into business financing and founding illustrates, among other things, how to borrow 90,000 from a stranger in 5 days; invest 500 to raise 329,000; free advertising in over 100 trade journals; how 100% was borrowed to buy a building for retirement; more than 3,000 lenders; plus much more on getting the money for your new or existing…
Here’s How to Use OPM to Better Manage Your Debts
Suppose you borrow $4,000 net on a personal signature loan. Your payments wil be $130 per month for 36 months. Let’s assume you’ve made six payments of $300 each on the note mentioned above. This is a typical situation.
With the $4,000 cash you receive you can make $4,000/ 300 = 13 and one-third payments on your $300 note. Or, if you wish, you can make 26 and two-third payments of $150 each on the $300 note. Since you’ve already made six payments on the note, this would carry you past the end of the note payoff period. Your monthly payments would be $150 + $130 = $280, which is $20 per month less than the seller’s note payment. This really isn’t too much relief.
Your best bet would be to use the $4,000 cash to make 13 payments of the $300 note. Then you need pay only $130 per month, instead of $300 per month, a saving of $170 per month. At the end of 13 months you will be faced with a payment of $300 + $130 = $430 per month. If business is better at that time, you can make this monthly payment. If business isn’t better, you can refinance the $4,000 bank note. You will have repaid $1,690 ( = 13 months X $130 per month) on this note, of which about $290 will be interest. Thus, your actual repayment of the loan wil be about $1,400.
Any bank would lend you this $1,400 plus another $1,000. You would then have $2,400 cash and would owe $2,990=( 23 month X $130 per month) in addition from the first loan, for a total of $2,400 + $2,990 = $5,390. Your monthly payment on this would be about $175 per month for 36 months.
You have eleven payments of the $300 note remaining ( = 30 months – 13 payments – 6 payments). If you wanted, you could make eight payments of $300 each with your $2,400 cash. You would then have only three payments of the note to make.
The bank must, of course, be repaid $175 per month for 36 months. This, however, is a manageable payment, compared with $300 per month.
IWS-85 : How to Build Your Real Estate Fortune on Other People’s Money
This absolute classic form Tyler G. Hicks shows you how to build real estate wealth using other people’s money. How to Build Your Real Estate Fortune on Other People’s Money is chock full of useful examples and crystal clear elucidation that will help anyone seeking to build wealth in real estate. Whether you’re a blank beginner or a long-time player, you will learn an incredible amount with this thorough look at forging real estate fortunes.
Use Your Cash Wisely
Money has a time value. That is, money in the hand may be worth more than a series of future payments, such as the $300 monthly note mentioned above. So when you borrow a sum of several thousand dollars, go to the note holder and ask him if he’d sell you more than thirteen notes for $4,000. He may need money so badly that he’ll be willing to sell sixteen or eighteen notes for the price of thirteen. This is not a dishonest practice; it is done frequently in both small and large businesses.
Guard your cash wisely. Don’t alow it to go to your head. If you hold the cash you borrow, deposit it in a savings bank. This cash will earn interest in the savings bank. The interest will help repay some of the interest you must pay on the bank loan. Withdraw enough cash from the savings bank each month to pay the monthly note, or half of it, depending on which method of payment you chose.
Keep in mind at all times the advice of a famous millionaire. He said, “When you’re poor, cash is scarce; when you’re rich, you try to make your cash scarce so others won’t take it away from you.”