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Financial Freedom - Good Debt VS Bad Debt

9 December 2005 No Comment

In last 2 posts, I touched the issue of Debt Free. You can click here to check it out. All I’m talking in my last 2 posts is concentrating on our choice to choose whether debt free or debt control. But if you choose debt control like what I choose for, then you must know more about debts. Today I’m going to post a simple theory of what is good debt and what is bad debt.

In this world, there are 2 kinds of debts : good debts and bad debts. Good debts are weapon for you to make money. Bad debts are your enemies and make you lose money. So what kind of debts you have today? This is a serious question that you should ask yourself everyday.

How to determine a debt is good or bad? Let me give you a good simple 2 real life stories. The 2 stories are about my customers, I will call them Mr. A and Mr. B here.

Good Debt Example:
Mr. A is a retiree. He retired with financial freedom. So how he do this? Before this he was a civil engineer and has a high paying job. What he did is, he saved more than 60% of his income to invest in real estate markets. First he gets a small double-storey house and start building his own empire from there. Until 1 day he managed to get a bungalow and gets a mortgage from a local bank. Now he has mortgage that most people have. If I’m not wrong, the monthly installment is $3000+. The next step he did is rent it out. He managed to rent it to a CEO of a local company with $8000+ of monthly rent. Yes, you are right, he was making $5000 passive income with his bungalow. Finally he financial free! The rent already covered his mortgage and make his mortgage becomes a tools to own the bungalow and make money from it. In bull market, while the economic is good, he manages to rent it up to $12000! According to him, the rent never goes below $3000 and he never loses money in this investment all this year. Until today, he already owns several apartments and bungalows that still giving a really great passive income for him.

Bad Debt Example:
Mr. B is a doctor. He owns a clinic and has 10000+ of patients. Everyday he meets a lot of patients and makes a really great income every month. However, he still struggle financially. Why? The reason is he has too many bad debts. He owns 2 Mercedes Benz, 1 for him and 1 for his wife. Besides that he also owns a bungalow. Every month, most of his income is being absorbed by this 3 little toys - 2 cars and 1 bungalow that don’t make any money for him but instead he has to pay for them. However I found that Mr. B do have a bad habit that always bring bad debts for him. It is shopping gratification. He always look something to buy, new mobile phone, computer products (I quite happy with this since I will have some sales, how bad I am) and others thing that not sometimes really necessary. Recently, he just gets a new 4 wheel drive. Do you think he still needs the new 3 wheel drive since he has 2 Mercedes Benz? I think this time he will suffer more.

Above is just 2 really simple example (It should be a long story, but I make them short so you won’t fall asleep, So now I hope you know what is bad debts and what is good debts. Next time, let us get more good debts before we get some bad debts. Let the good support those bad, and not ourselves.