Good Debt vs Bad Debt
GOOD DEBT VS BAD DEBT
If you are planning to borrow some amount of money from a bank to acquire a property or something else, then you're just about to incur a debt.
What normally comes to your mind each time you come across the word 'debt'? When you ask a good number of people you meet on the street, what they think about debt, you are most likely going to get a common answer, 'debt is bad.' That said, but it is mostly a wrong perception. Actually, debts can come in two different forms - Good debt and Bad debt.
Definition and example of good debt
A Good debt is the kind of debt you incur in order to fund a new kind of investment. This investment has to be profitable from day one, and what I mean by saying profitable is, your investment has to bring more money to cover the interest on the debt and all the fees involved and if there is any money left for you, that would be considered a good debt. In other words, a good debt puts money in your pocket every month.
Definition and example of bad debt
Bad debt on the other hand, is what people usually and ignorantly refer to as debt. Bad debt brings little or no financial improvements to your investment. Rather it forces you into losses. Getting a loan to purchase a new car or buying a brand new home entertainment system using your credit card are examples of bad debt. In other words, a bad debt takes money from your pocket every month.
The most popular misconception today is around our home loan, or as many so-called experts love to say is our most valuable “asset.” So the question is, our home, a place where we live, is it an asset or liability, is it good debt or bad debt? To answer this question, it’s better to ask yourself, does the place where I live take out or put money back in my pocket? If it takes money out of your pocket, then it is a bed debt.
On the other hand, if you have tenants paying you rent, and you take the money and pay your mortgage and have anything left, then it would be a good debt, cause at the end of the month it puts money in your pocket.
Your ability to distinguish between good debt and bad debt will help you make wiser decisions on whether or not to acquire debt. To be wiser with your money, stay away from bad debt and acquire good debt. Stop giving your hard-earned cash to someone else. Because bad debt takes money out of your pocket, you had better think about how you can get good debt because good debt puts money in your pocket.
Recent Comments
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Thanks Tom!