Good debt versus bad debt

The word fault is often associated with the idea of Borrow. With this relationship in mind, we will discuss the differences.

Today we hear “Debt is bad. Getting out of debt. Pay off your mortgage. No debt is the way to go. Living debt-free is a must for financial freedom.” I think people were really scared of this topic.

But remember that time we kept hearing that fat and cholesterol are bad? You would find people at the grocery store looking at the labels to make sure they weren’t in the groceries they were buying. So when we got the information that there is good fat and good cholesterol, people’s heads were spinning.

The same goes for debt. There are two types of debt: good debt and bad debt. Plain and simple, when people use debt to buy assets (things that bring you income), that’s good. On the other hand, when people use debt to buy doodads and liabilities, it’s bad. Can you guess what the rich do?

Good debt is used to produce, while bad debt is used to consume.

The good

It’s good if it can help increase your productivity and wealth. If you borrow to buy assets like real estate and use them for cash flow, use it to your advantage. The tenant of the property actually pays for the liability.

At the time of this writing, my wife and I have just signed up for a Bob Proctor coaching program. It has been our most expensive coaching program to date. While we could use money from our contingency fund, we’ve decided it’s best to keep our reserves intact. Our next option was to use some of our cash value from our life insurance policies. However, we have found that it is easier to borrow from our policies when an investment opportunity arises.

The option we finally took was to load it onto our American Express Blue Cash credit card. While this may make some of you cringe, it made more sense for us to use someone else’s money. This money is used to invest in us where the potential returns are limitless.

Rest assured we have a strategy to pay it back.

The bad

It’s bad if you use it to consume. (Bad is a relative term in the sense that it’s not used to increase your wealth.) Some use credit cards to fund lavish lifestyles and are falling deeper and deeper into the hole.

I recently read that the average credit card household owes nearly $10,000 on their cards. If those balance sheets are the result of destructive consumption, then those households are in trouble.

Credit card companies like students. They charge a lot and usually pay the minimum because they have virtually no income to make up for it. But I’m sure the students love them too. They usually offer free stuff.

the ugly

Let’s look at the example of an average household that has nearly $10,000 in credit card debt.

Amount – $10,000

Payment – $200 per month

Term – 78 months

Total Interest – $5,790.32

Total – $15,790.32

Paying $200 a month will take 6.5 years to pay off that $10,000. To make matters worse, the interest repaid is more than half of the principal. Now how ugly is that?

The truth

To be honest, debt isn’t what everyone thinks it is. According to accounting, debt is present when your liabilities exceed your assets. When your assets exceed your liabilities, it is called equity.

Popular finance pundits like Suze Orman and Dave Ramsey say get rid of all debt. They say avoid it. And I agree, because of the true meaning: liabilities > assets = debts. But that’s not the definition they use. Their attitude is that any kind of borrowing is bad. But as we discussed above, it’s good if you borrow something to produce more.

To get debt (or credit) on your side, here’s the formula:

Increase your liabilities to increase your wealth to increase your wealth.

Debt can hurt you if used improperly and irresponsibly. But we use debt differently. We use it to increase our productivity and wealth. Only use it to your advantage.

If you can accept that there is good fat and good cholesterol, remember that there is good debt. Do you have debts that weigh you down or debts that help you become financially fit?