'Good debt makes you rich': Ken McElroy and Robert Kiyosaki are sitting on a combined $2 billion in debt — but they’re not worried. Here’s how borrowing can supercharge your wealth

How owing money can help you grow rich

McElroy and Kiyosaki aren't afraid of debt for a simple reason. It's helped them to grow rich.

"Our job as entrepreneurs and capitalists is to figure out how do we use debt and create assets that other people reach into their pockets and give [money] to us for?" Kiyosaki says in the video.

The duo explains that when people deposit money and banks pay interest on it, that becomes a liability for the bank. The only way the system works is for the banks to turn around and lend the money to others.

Those who lend this money and use it wisely help balance banks’ books. They can often score tax breaks that help turn that borrowed money into an asset that grows their own wealth.

The key is to do it right and take on debt for the right reasons. "Good debt makes you rich. Bad debt makes you poor," according to Kiyosaki.

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Good debt vs. bad debt?

Of course, not all debt is going to help you improve your financial situation. "’Live debt-free’ is good advice if you don’t know how to use debt to get rich. 90% of people use debt to get poor," Kyosaki says.

The key to using debt to get rich is to avoid using debt to buy assets that depreciate over time. Instead, you should find an asset that will appreciate (or go up in value) and, ideally, that people will pay you for.

One way to do that is to look at what banks will use as collateral. If the bank is willing to make the loan not based on your personal guarantee but based on the value of the asset itself, that's a good sign that the debt is subsidizing a good investment.

In the video, McElroy gives a few examples:

• Buying real estate with a loan and having tenants pay off the debt for you through rental payments while you benefit from property appreciation.
• Starting your own business.
• Financing a $10-million jet with an $8-million loan and claiming a $10-million tax break, as McElroy did under rules introduced in 2017 allowing companies to write off the full value of eligible assets (like planes) in the year of the purchase.

When you can find these or other assets that are going to grow your wealth over time, the duo explain, borrowing just makes good sense. In fact, they even go so far as to argue that a willingness to use debt wisely can make all the difference in whether you end up rich or not.

Poor people "always say ‘I can’t afford it,’ rather than ‘How can I afford it?’" according to Kiyosaki.

If you want to start borrowing on your path to becoming wealthy, you should first consider if you have the right temperament. Both McElroy and Kiyosaki warn that jumping into borrowing is a bad idea if you aren't willing to develop the specialized knowledge needed to understand when and how debt can be used as a tool to grow your wealth.

If you study and learn, though, then there's no reason not to leverage debt with the ultimate goal of acquiring assets that make you rich. If you do, you just may end up with a private jet of your own some day.

Sources

1. YouTube: We are $2 Billion in Debt, Here’s What Banks Don't Want You Know about Money (June 6, 2024)