Good Debt vs Bad Debt
CAN DEBT BE A GOOD THING?
People always say, especially those who are smart in handling money, to avoid borrowing money or never engage yourself from having a debt. They say, stay away from credit cards, or earn the money you need and don't take the risk of borrowing it from others because of the possibility that you might not be able to return it. But did you know that debt can be your best ally? Yes, it can be a good thing if you handle it the best way possible and knowing how to use it as leverage on your side.
It's easy to differentiate Good Debt and Bad Debt, it depends upon how will you use the money you borrowed and considering how will you free yourself from that debt. If the debt will create assets for you, it's positive and if it will only cost you liabilities, of course that's a negative debt. Even credit cards, although it has interests, can be used as leverage for whatever you need it if it will generate money and can repay itself. Here's how to tell their difference.
There is a saying "it takes money to make money". Meaning, if the debt you take will help you generate income and will increase your net worth, then it is a positive debt. Here are some examples of good debt:
· CAPITAL: Starting your own business will need a large amount of capital at first, but will eventually generate income and assets. You must plan your business carefully and don't let your own ship sink.
· ASSET INVESTMENT: If you're into real estate business and you got lucky to find a piece of land or building at a low price that will eventually appreciate, it's worth it to take the risk of loaning the money. Selling it to a higher price will make you profitable or leasing it can also be an option. Investing in equipment's or machines that will help your business grow faster is also part of this.
· STUDENT LOAN: This debt can also be an example of good debt because it will help you become a graduate if you study well. It's a good investment because college graduates typically get paid more than non-graduate employees and interest rate is relatively low.
The good debt has the potential to increase a person's net worth and generate income, the bad debt will only drain a person's wealth. This includes the purchase of depreciating assets or using the money as luxury. Bad debt will poke a hole on your pocket until your money is empty. These are some examples:
· GAMBLING: Whether you're a poker master or a casino hustler, gambling is a tricky game to play and you will lose at some point in your life. You win some, you lose more. Being addicted to it and be tempted to loan money for the next game may be a bad decision.
· LUXURY CARS: Cars, whether you like it or not, is a liability. You are required to pay for gas, maintenance, insurance or accessories. Using it as a "status symbol" will only lose you more money. If having a car isn't really a necessity for you, don't loan for it. Walking or riding a bike can be an option and will also benefit your health.
· EXPENSIVE TRIPS: Tours around the globe and having luxury vacations probably are the dreams of many individuals. But having it from borrowing money and undetermined if you can repay it, may be a bad idea. Other than interest rates, you may be charged in law suits and may be put in jail.
· BAD INVESTMENTS: The name itself says it all. Don't commit for unsure investments from suspicious people. They might tell you to invest in them or into something you're not really good at and end up struggling in the end. It might be a scheme from con men that will trick you by sugar coated words.
In the world of business, using your resources and choosing your allies are critical. In order to survive, you must thrive, this includes borrowing money or having good debt from trusted lending companies. We take risks everyday, but planning ahead of time is a smart move for everyone who wants to play the game of money. Just be careful for every plans you make and every step you take. Remember, debt and death sounds similar.