Good Debt VS. Bad Debt

There are two kinds of debt in this world: the kind that costs you money and the kind that makes you money. Each one charges interest, but only one costs you money. Let’s break it up into two main categories:

Bad Debt VS. Good Debt

Let’s start with bad debt.

For the sake of keeping things simple, bad debt can be defined as anything that takes money out of your pocket. Really we’re talking about personal consumption items or expenses that are not spent with the intention of earning you money. For example how does buying:

· A Big Screen TV

· Alcohol

· Or the latest trendy clothing

Put money in your pocket? That’s why we say, bad debt takes money out of your pocket.

Lets now look at good debt.

Good debt is money that is spent with the intent that it will earn you more money then what you put in. Most people do not think of going into debt as a good thing, but really if you are borrowing money at, shall we say 6.5% interest, and you are investing it into, new equipment or real estate and earning a 10% return on that same money, you are really making 3.5% positive cashflow.

That’s why we say good debt puts money into your pocket.

Always ask yourself: will this put money in my pocket or out? If it will, do it more

No comments: