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OPM: Other People's Money

Home WealthBuilding 101 OPM: Other People's Money
OPM: Other People's Money PDF Print E-mail
Written by Chairman   

If you've ever taken on a mortgage for a house, had a student or car loan or bought anything on a credit card, you've utilized OPM, which stands for other people's money.  As you can see by our examples, the concept of using other people's money is not new to us.  We do it all the time.  So what is it I can possibly learn from this article?  Well, yes we do it all the time.  We are experts at spending other people's money.  The problem is, they want it back, with lots of interest. 


One of the things that separates rich people from the non-rich, is how they use OPM.  A non rich person will use OPM to buy stuff.  Yeah, stuff.  The stuff I am referring to is anything that decreases in value once you purchase it and/or doesn't earn you money while posessing it.  For instance, hamburgers, cars, music CDs, video games, clothes, food, appliances, those little addicting bottled Frappes, pie, shoes, accessories, your dog.  These are called liabilities.  The house you live in is a liability.  Although it might appreciate, it is costing you money every month, not generating money and its appreciation is only realized if you sell it.  At which point you need to buy or rent another place to live.  Your car is a liability, unless you are renting it out and earning more than your car payment is each month.  Not likely.  Your student loan is a liability until you start earning enough money to cover all the interest you paid on the loan and even after that, you've likely ended up with a J-O-B which is a liability in our opinion anyway in most cases.  (Unless what you make is worth more than the time and effort you put into it.  Hmmm, is it?)  But that is a topic for a whole other article entirely.  And lastly, there is the matter of credit cards, which the majority of people use to buy liabilities.  Using other people's money to buy liabilities increases your amount of bad debt.  What is bad debt?  I will go into bad vs. good debt in another article, but in a nutshell, paying 20-30% interest over time on a purchase that will lessen in value, well, that's bad debt.

The opposite of a liability is an asset.  An asset is something that when purchased, increases or likely will increase in value, such as art, a diverse stock portfolio, real estate or precious metal.  Assets may also earn you additional income, such as a rental property, an established business or a stock that pays dividends.  Rich people, and those wealth conscious, use OPM to purchase assets.  Rich people will also supplement their funds with other people's money to buy more assets or investments than they could with just their own money or increase their rate of return.  This is called leveraging. 

As an example, let's say you had $100,000 and wanted to buy real estate.  You could purchase a house for $100,000 and rent it out for $1000 a month.  At that rate, if you keep the house and just rent it, you will recoup your initial investment ($100,000) in 8.3 years and double it (a 200% return on investment) in 16.6 years.  By leveraging your $100,000, you could put $20,000 down on five $100,000 houses and obtain mortgages for the rest of the needed funds.  For simplicity's sake, let's say your mortgage payment on each house is $500, for a total of $2500, and you are still renting each house for $1000. Your total rent is $5000 and therefore your net income is now $2500 (Total rent minus total mortgage).  At $2500 per month, you will now recoup your initial investment of $100,000 in about 3.3 years!  You will double your investment in 6.6 years, in almost two years less time than it would take to recoup your investment if you had purchased the single house!

Now all of these numbers are purely made up and the end results will differ with every property.  However, you can see the power of leveraging and the proper way to use OPM.  The current economic cycle has made aquiring OPM more difficult that it was before, but you should keep it in mind as a wealthbuilder. You will certainly utilize it's awesome power someday as you continue on the path to wealth and financial freedom.  Remember, this lesson as you reach into your wallet for your credit cards and ask yourself, "Am I buying an asset or a liability?".  If all you've ever bought is liabilities, it's time to wake up and start thinking about your future wealth because purchasing (or creating) assets is how you are going to get there.


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