Good Debt and Bad Debt

January 7, 2008 · Filed Under How to Manage Money, Steps to Get Out of Debt

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I knew there are people who believe that being in debt is bad and they strongly agree that they should live in a debt free life. Well, this can be true and not true.

Personally, I believe that debts can be divided into good debts and bad debts. This only depends on how you use your debts. In fact, I strongly recommend you to accept the belief that there are good debts in this world because being in debt is a necessary if you want to achieve financial freedom or become rich faster.

What is Good Debt and Bad Debt

What is debt? Debt is a kind of loan or contract between you and the creditor. They will give you an amount of money in advance and you promise to refund it in certain period including the interest. So the power of debt is it can let you to have a certain amount of money in a very short time. In other words, it can let you to own something with money in a very short time.

So the way you spend the money will determine whether a debt is good or bad. It is the end results of your actions that will determine this. Besides that it also your choice to make a debt becomes good or bad.

Good Debt

Generally, a good debt is a debt that will put money into your pocket or bring up some kind of value for you. For example, if you get a mortgage to buy a rental property, this will be a good debt if you can rent the property out and generate positive cash flow. Can you see it?

A mortgage is only a good debt if:

You buy a property that can increase in equity(value)
You can rent it out(income)
Last but not least, the rental can cover your mortgage monthly payment(put money into your pocket)

It is your job and ability to transform a debt into a good debt. Don’t worry, this skill can be learnt.

Below are the characters of a good debt:

It generates money for you. A good debt will generate income to you, a positive income.
You feel happy with it. Don’t you feel happy if a debt can put money into your pocket.
They are investments. It will generate money to you.
Positive cash flow. A debt will become good if the money it generated can cover all its expenses and at the same time can put money to you.
You can have 100 of them. I think everyone can have 100 of good debt if each of them can generate money.

Bad Debt

Bad Debt is debts that will take money away from your pocket and make you feel stress and worry. For example, you apply a mortgage again. This time you buy a house for your family. Now this is a bad debt as it won’t generate any income for you and you have to take care of all the expenses of your house in future.

In this example, a mortgage is only a bad debt because:

You will not rent your house so no income for you.
You have to pay all the expenses of your house so it will take money out of your pocket.

Below are the characters of a bad debt:

It takes money from you. Bad debt is a liability and it will take money from you.
You feel stress with it. Bad debt can make you stress and worry.
They are liabilities. They are liabilities because they take money from your pocket. In fact, most of them are disposable and durable products.
Negative cash flow. You have to pay all the expenses of the debt such as interest and etc.
You cannot afford it. I believe we cannot accept a debt that takes money from us. Not even 1.

Again it is your choice

Just like what I explained in Be Rich or Be Poor? It is Your Decision, it is your choice that will determine a debt to become good or bad. If you decide to be rich, then you have to reduce the bad debts and own more good debts. Good Debt is obtained through making wise decisions for your future and vision. If you get a debt that is good for your future, then most likely the debt will become a good debt.

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