Simple yet super important financial question that 95% of people get it wrong (including me).

I thought I was pretty smart with numbers and money, but apparently after my chat with my good friend from San Fran, I was wrong.

Here are two scenarios, and you pick one that you think has the highest return over 50 years:

A) You have a sum of money invested in something that gets you an 8% return per year. It is your own money, so you didn't borrow it, and you don't have to pay interest on it. You invested an initial sum of $100k.

B) You don't have a single penny under your name cuz you're broke as fuuuhhh. Every single penny you borrow, you have to pay 3% interest on it per year. You borrowed $100k with an interest rate of 3% per year. You invest the $100k in something that grabs you 9% return instead of 8%.

Which choice, out of choice A or B, would give you the highest return over 50 years?

Surprisingly, it's choice B that would net your more money over the long run.

Choice A nets you 4.70 mil.
Choice B gets you 7.35 mil from the investments, and -1.15 mil from the built up interest, so the net return would be 6.29 mil.

Choice B makes you 1.60 mil richer.

Don't believe me? Do the math yourself on excel.

So I guess the principle behind this is to borrow as much as you can for a rate as low as you can, and then invest it in something that has a high enough return to offset the amount you pay for interest. It's like effin' magic.

There is this other thing called the Smith Maneuver  that operates like this.

Here is a YouTube vid that explains it.

Example of Smith Maneuver:

I buy a house. House is worth $1 mil. I get a mortgage from the bank to pay for the house. Let's say I was able to borrow $750k at today's mortgage rate of 4.3% over 10 years. Initially,  I'll have no more room to borrow more money from the bank, cuz the bank is like, "Yo dude, we gave you $750k cuz we can take your house if you don't pay back, and you haven't paid us back a single penny."

So I'm like, "Yo bank okay, here's some money.", and I pay the bank back slowly, following the amortization schedule set out in the contract. So let's say I paid back the bank $2k. I say to the bank, "Yo bank, I paid you back $2k. Can I borrow that $2k again?"

The bank would be like, "Well, we're only suppose to loan you $750k because you put your house as collateral. You paid us back $2k, so now you owe us $748k instead of $750k. We have room to loan you $2k, and it will put you back to where you were before you paid us, which was $750k. Sure convolutionx, we'll loan you the $2k you just gave us."

So now they gave me $2k. My mortgage shrank because I paid $2k, but my overall debt did not shrink because I borrow $2k again. What I do with the $2k now is to invest the money somewhere. Let's say I just invest it in index funds, which historically gave me a return of 8% per year. With the practice you did above with choice A and B, you should know what will happen over time.

It all boils down to transforming your "Bad Debt", which is debt that gets you nothing but interest payable, into "Good Debt", which is debt that makes you money, and gets you interest receivable.