The Difference Between Bad Debt and Good Debt

DEBT.

Whenever we see the word, we shudder. It’s that word that makes our stomachs churn, our minds reel, our hairs stand up… ok, so maybe the last one is an exaggeration. The point is, many of us believe that debt is bad, bad, BAD. The irony of it though, is that the ones who think that debt is BAD, are the ones who actually sink into the hole of financial ruin. On the other hand, the ones who believe that debt can be GOOD, are those who seem to be on the road to financial freedom. So what exactly is it about debt? Is there really such a thing as Good Debt?

The simple answer is YES. Good debt does exist. It just depends on how you use that debt to either get ahead, or be left behind. Here’s the simple principle behind it:

Good Debt puts money in your pocket. While Bad Debt takes money out of your pocket.

Does that sound confusing? I mean after all, when you take on debt, that means you’re already in way beyond your means! Well, the thing is, even if you’ve taken on a loan that’s much bigger than your current income, it’s completely fine, as long as that loan can pay for itself.

Let me give you an example. Let’s say you took on a loan to buy a property. Obviously you’re going to need to pay the bank back every month. Let’s say your monthly amortization is $3,000 per month. Now, you’ve taken this property and had it rented out for $6,000 per month. This allows you to pay off your $3,000 monthly amortization, while keeping the other $3,000 for yourself! Basically, what you’re doing here is using other people’s money to gain even more money. This type of good debt is also known as leverage. Sounds familiar?

Now what about bad debt? This one is more familiar to us. Let’s say you needed to buy a car, desperately needed it to get to and from your workplace. You take on a loan and surely, this is good debt right? After all, the car is a necessity! Well, it may sound that way, and it may feel that way. But is this debt putting money into your pocket? Of course not! In fact, it’s even taking more money out of your pocket with the gas, maintenance, and cleaning you need to do.

So when it comes to debt, it’s important to look at the numbers, and not at your feelings. Even though it may feel good to obtain something, (because it’s being sold so cheap, it’s a bargain! or I really need this thing, it makes my life so convenient!) the bottom line is, does this debt give you money or does it make you lose money?

It’s really all a matter of logic. So save yourself from the trouble of bad debt, and go the next level by learning all about good debt, and what you can do to master it. Next thing you know, you’ll be so deep in debt, but yet so rich at the same time. Because you know, you’re deep in GOOD debt.