Sunday, 5 July 2020

Difference Between Good Debt vs Bad Debt


In this article. We will uncover why it sometimes does and does not make sense to take on debt to increase your wealth. to do that, I will go through the different types of bad debt along with good debt and Give you examples of each one and by the end of it, You will know how to leverage good and bad debt to your advantage. Now, I do not want you to get burned. So I am going to show you how to reduce your risk of losing it all when it comes to leveraging that good debt. 

The beautiful thing about today's day and age is that we are fortunate enough to have access to choices. Many many choices, choices are extremely important because you and I are completely different. And you might not care about the things that I care about and some people will tell you to never go into debt for anything. But that's just not true in many cases, to truly understand the difference between good debt and bad debt. We need to look at both of them separately. Because sometimes depending on your particular situation. A good debt could easily be turned into a bad day very very quickly.



What Is Bad Debt



Depreciate

To easily understand what bad debt is? Think about things that you borrow money for that will not give you some sort of return while carrying that debt. You could also think of it as things that will basically depreciate or are a sunk cost Depreciation stinks when you are not getting the return on that item.

Now Let's go through a couple of examples of bad, 


Car loans

By far one of the worst types of debt out there. It is an item that not only costs you money to maintain, but it greatly decreases in value at a faster rate. Especially if you buy new. And just so you know, it is financially Stupid, to buy a brand-new car so please do not be stupid. I know you are smart so you probably have not done it yet, and if you have, fix the problem.


Credit Cards

This one makes an appearance on both the good and Bad debt list and I will explain the good side in a minute. A credit card would be considered bad debt for Anything you put on your credit card it charges interest where those items are not Generating you a higher return than that actual interest rate. This can be anything you put on your credit card from that laptop To clothes, to even that gym equipment that I have in my garage if I would have charged it onto my credit card.


Student Loans

This might get me in a little bit of trouble by some people because you might disagree. But while you are borrowing student loans, they could be considered a good debt because the return on that investment Is coming in, in the form of knowledge. Once you were done with school and have a job student loans instantly turn into bad debt in my opinion. Very very bad debt, because the only way to get rid of those things is by dying or paying them off. Take your pick. Yes, there are loans that you took out to get a college education to hopefully make more money. But once you are done with that education and you have a job. It is not generating you a recurring revenue, your current job And experience are. There's also no guarantee that you will even get a specific return on your student loan debt. That's where things get a little bit weird, and why I question some of the things going on in our current education system. But we are not going to talk about that right now/


Mortgage As Bad Debt

The mortgage on your primary residency for most people is bad debt. You might be saying, why? well, that's because most people own a home for the sole purpose of needing a place to live. We tell ourselves the story that, Oh, my home is going to generate me so much money when I sell it. Okay, cool. When are you going to sell it? um, I don't know?. look, I understand that most buy a home in hopes that the value of that home will Appreciate. And that could definitely be the case, but while it's not generating you any money. And you don't have a plan to sell it when it hits a specific value, then it's bad debt. You are only hoping that it will give you a return on your investment when you sell it. Now, There's a lot of debate out there whether a home is a good investment or not, but that's outside of the scope of this conversation right now.

Here's a real-life example with me. I currently own a home with a very modest mortgage payment, I am not receiving any money from it because I don't have any roommates at the time, so my mortgage is bad debt. But my plan in the future is to rent this property out, at that point, it will be giving me a Recurring stream of revenue as long as someone is living there, at that point. It will hopefully be good debt.



That's the list of bad debts if you have any complaints that you want to file with me, leave a comment down below.

Let's talk about good debt good



What Good Debt


Appreciate

Good debt is used for one thing. To generate more money even though good debt can be considered good. There are always cases where this can turn into a bad debt that could ruin your finances. later on in this article. We will go over how to increase your likelihood that your good debt starts out and stays good. 

For good debt, think about those things that will give you return and appreciate. 


Credit Card

Credit cards are good debt. Credit card debt that can be paid off every month with the sole purpose of the reward benefits is always Good Debt. It could also be considered good Debt if your return on the money borrowed is at a higher rate than how much you were paying in interest.


Mortgage Investment

We've got a mortgage for some sort of rental property as good debt. If someone wants to start investing in real estate. Then debt will most likely need to be taking. Who in the world has hundreds of thousands of dollars just to dump into a couple of rental properties to start making money off of. Not many. So whether you are flipping houses or purchasing properties for the sole purpose of renting them out, this can turn out to be a very very lucrative way to leverage debt in your favor.


Business Investment 

I don't fully agree with this one, but I am not here to hide information from you because I don't completely agree with this thought process. Depending on the type of business, there does come a time where debt may need to be taken on to grow the business. This is not always the case. But this is usually the case when it comes to a business that sells, think of a physical product, now I am of the opinion that you should not take on debt to start a brand-new business. Period. I have a very hard time believing someone who says that you have to take on debt to start a business. You 100% Do not. I actually think that it's a very stupid move to borrow money to start a business when you don't even have a proof of concept. If you can not afford to start it up by funding it yourself or finding investors. Then you should try something else and come back to this idea when you have more money.



How To Reduce The Risk Of Good Debt

If you decide that you want to start working with good debt to try to increase your wealth, the first one we are going to talk about is of course the mortgage or rental properties as good debt.


Mortgage Investment

If you want to start investing in rental properties. Then you need to do one of two things or both, 


You Need To Start Small


Buy a property that you know has a high likelihood of making money. But the returns may be smaller than you would actually like, this first property can be a way for you to test out the waters. Just to make sure that this is something that you want to get into, It will also be a way for you to focus on the whole learning aspect of what goes into Property investing especially if you have not done it before.


Educate Yourself


I would even say find a mentor who has done this sort of thing before, there are all kinds of great resources out there to help you start learning about this area of investment.


Business Investment As Good Debt

I would recommend that you start small. That's my main Recommendation for you. First, you want to prove the business model and prove that you were selling something that people actually want while you were cash flowing the whole thing out of your pocket. Cash flow that business until you are to the point where you cannot grow without any sort of outside investment or an influx of cash through some sort of debt. Then before you accept any kind of money you have to stop and ask yourself. Okay. Am I content with the current revenue that I am making or am I okay with selling off some of the company or borrowing to speed up the process. That's going to be a very important question for yourself, That's going to be specific to you depending on your situation and what you really want because if you were happy with the current state of your business. And you are willing to grow slowly, then do not borrow money, or don't take outside investors.

I have cash flowed all of my businesses in the past, and I am glad that I did because some of them did not end up working out. So how bad would that have sucked, if I had taken out a bunch of debt and then failed? Let me answer that for you, It would have sucked really really bad. 






Conclusion

What comes down to is the fact that taking on debt is not the actual problem, the biggest issue that most have is getting their debts under control and learning how to properly manage money. And there's no shame in admitting that you are not good with money or that you have not been good with money in the past. Why in the world would you borrow more when you have not proven to yourself that you can properly manage debt. Getting your bad debts paid off and learning how to properly manage your money is the foundation of this whole thing. So if you don't focus on that first. Then you are just building a house of cards that will be more likely to fall down. So do you want to build your life on solid ground or a pile of sand?

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