The Value of Debt
The personal finance community has very different views of debt. Some believe debt is irresponsible and should be avoided. Others believe that debt is a powerful wealth-building tool that should be leveraged. Personally, I love debt, but not all debt. Certain debt. In my opinion, you can’t love or hate debt because it is all so different. I love certain kinds of debt and believe you shouldn’t have other kinds of debt at all. In this article, I am going to break down debt for you and show you how to become rich by utilizing it.
What is Bad Debt?
Bad debt is harmful to your long-term financial position. This debt is used to finance your “lifestyle.” This debt may be taken out to purchase something you want, but don’t have the money for like a vacation or a new car. Even if it is for personal expenses like groceries, it is considered bad debt because it isn’t helping your financial position.
This kind of debt is bad for two reasons. To start, you are living beyond the amount of money you are bringing in. If you are spending more than you are making, you will never be wealthy. You will always be trying to “catch up.” If this is you, then you need to check out our side hustles video, to learn ways you can make additional income.
The second reason this kind of debt isn’t good is that it normally has an adjustable interest rate or a short-term fixed interest rate. This means the amount of interest you owe each month can and will go up over time. This will only set you back further financially as your payment increases.
What is Good Debt?
Good debt is debt that finances your investments that will benefit you in the future. Good debt is invested into things that appreciate and move with inflation. Real estate that cash flows, a profitable business, or your own personal mortgage are all examples of good debt. For debt to be considered good, it needs to also be at a long-term, fixed rate. This means the rate cannot change over time. A personal mortgage is a good example of this. You will always owe the same amount each month, no matter how your financial position changes over time.
Both good and bad debt comes with risk. To avoid finding yourself in debt you can’t pay back you need to be educated about the debt you are taking on. This is why at KenMcElroy.com we teach about cash flow and personal finance. We want you to understand all the aspects of taking on good debt and making sure it is a good investment. However, with all of that being said you shouldn’t be afraid of debt. Debt is a critical wealth-building tool for people who use it responsibly. In fact, I would argue you can’t get rich without it. Do your research, learn what types of debt are best for your needs, and only take on debt that is used to fund an investment into your future.
Until Next Time,