Good Debt vs. Bad Debt

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So what exactly is debt? For most people debt is a scary term that means you owe money to a company or person. What most people don’t know is that [highlight]there is a secret type of debt that wealthy people leverage everyday to make themselves millions of dollars off of other people’s money.[/highlight]

In this article you’re going to discover the difference between bad debt that keeps you poor and good debt that will make you wealthy.

Good Debt is investment debt that creates value…

for example, real estate loans, home mortgages and business loans” -Eric Gelb, CEO of Gateway Financial Advisors and author of “Getting Started in Asset Allocation

Good Debt

Conventional wisdom says to avoid debt like the plague BUT certain types of debt, when used properly, can make you incredibly wealthy. Another word for debt is leverage. Lets say that you have $20,000 to invest. $20,000 won’t go far however you can put $20,000 down on an investment property and finance around $60,000. You’ve now leveraged your original $20,000 into $80,000.

With this $80,000 you now have more leverage to purchase an investment property that will immediately be cash flow positive from month one even after you’e paid off the loan note every month.

Another example of leveraging good debt is let’s say you have a clothing company. You have just received an order for more inventory than you currently have or have the cash flow to fulfill. You can take out a loan to cover the invoice so you can deliver the inventory on time, make a profit and have money over to pay off your debt.

These are just a few examples of how you can start immediately leveraging debt to make you money.

Bad Debt

Bad debt is the exact opposite of good debt, it is debt that drains your wealth and offers no real prospects of paying themselves off in the future.  

It can also be any form of debt that carries a high interest rate, for example if you were barely making the minimum payment on your credit cards, you are in bad debt. Bad debts have no realistic repayment plans and often build up when people make impulse purchases of items they don’t need.  That new watch you bought on credit will lose 50% value as soon as you walk out the door.

Cars are often mistaken as a good debt decision, and many people still buy their vehicles through a loan.  However if you apply your new found knowledge you would know that a car depreciates in value after you buy it on top of the fuel and maintenance fees, and therefore is a bad debt.

Putting it to Practice

Now that you have discovered good debt when it can be used, we will uncover some essential characteristics of good debt and how it will help us put it into practice.  One of the keys to good debt is that you have an exit strategy, you know how you are going to make your money back and when.

You don’t need a Master’s degree in finance to master good debt.  Most of the work you do when making good debt decisions is in the plan, know what you are going to do with the money and how that will benefit you in the long run.  Keep your eyes, ears and mind open to new solutions, ideas and opportunities where you can lever your funds to help you begin to prosper.