Good debt vs bad debtWhen you see the word
debt, what comes into your mind? Is it the HELB loan, the soft loan you took from a friend, the goods unpaid for in the shop in your estate, mortgage or that credit card debt that keep following you?
We have two forms of debt that are fundamentally different and can never be painted with the same brush. Read on and you might discover how debt can actually be good for you, when managed properly.
Bad Debt – This is the kind of debt that sounds very familiar with most people. A typical life starts with some student loan (HELB). Soon after you get employed, you apply for some credit cards (very enticing). Thereafter you get a car loan to keep up with the Jones (still very appealing). Later on you get to the mortgage (not so bad at least). Somewhere along the line serious expenditures weigh on you and accumulate very quickly. Before you know it, you attempt to get out of debt using any possible means including piling more debt, or loosely put borrowing to repay other debts. Sounds crazy but kinda familiar. Rat race I guess. But we at least covered a topic on how to get out of this race.
Why is this bad debt? All of the above with an exception of the mortgage actually work against you; at least the mortgage goes towards building your future. Let’s say that bad debt is the kind of debt that results from overspending on things you really don’t need – things that can never provide you with any sort of return. Spend too much on these frivolous items and you’ve got quite a problem on your hands. A very dangerous problem that can kill you; relax you ain’t dead at least.
By the way, some relatives and some friends form a big part of the bad debt we write off at a personal level. They are in the habit of acquiring soft loans from us that they don’t plan to repay; or they fail to repay. I use a strategy to deal with that by blacklisting the bad debtors. So I give out the cash that I am comfortable losing and if the likely event of losing happens, then I blacklist the culprit. In the unlikely event that I get paid the soft loan, I can comfortably give more to the fellow in future. Those who are blacklisted will probably not bother you in future, but if they are hard headed and decided to come back to ask for more, I remind them of what they owe me with specific details including the date they borrowed and the amount. Some are shocked and take to their heels.
Good Debt – This is a totally different type of debt that we commonly refer to as leverage. In a layman’s definition we can loosely define it as use of borrowed capital for (an investment), expecting the profits made to be greater than the interest payable. Essentially, you are going into debt in order to make more money for yourself in the future. In the right hands and with the right techniques, debt is a very powerful tool that can help you make more money, not less. When handled incorrectly, debt is nothing more than an albatross (a source of frustration an encumbrance) that will bog you down financially. Good debt is something that will free you from financial worries.
We shall expound on the leveraging in the next post.
When I admire the wonder of a sunset or the beauty
of the moon, my soul expands in worship of the Creator.