Debt is simply an amount of money you owe someone else for something you’ve already purchased – it could
be a house, car, items purchased by credit card, personal holiday or something for your business. Any loans you are still
paying off – pay day loans, house mortgage, etc - are debts.
Unfortunately, throughout the western world
levels of personal debt are at record highs – largely driven by the power of consumerism, the use of credit cards and
more easily attainable loans through sometimes ‘predatory’ lenders.
So reducing these debts may be
high on your list of priorities if you’re one of these people.
Don’t get me wrong – debt is
not a bad thing, but the ‘type’ and ‘level’ of debt you’re in might be. The important thing
is to understand your debts and have a strategy for paying off them off.
But don’t fear debt – understand
it, and get in control of it, rather than letting it control you.
But what is good and bad debt?
The concept of investing is that to make money, you need to spend money.
Many people actually borrow money
[and therefore go into debt] to put into investments such as shares and even managed funds. This is “good debt”
because it is off-set by your return on investment – provided of course, you picked a wise investment!
Other
examples of ”good debt “ are house loans, because your house is also a valuable asset in your wealth portfolio
and car loans – although cars depreciate in value, they are usually essential for getting to work, etc. and therefore
considered a part of acquiring wealth.
Student loans, debt incurred in the course of developing your career and
business loans are all considered to be good debt. In fact, you may even be able to claim the interest component of business
loan repayments as a tax deduction – but check this with your tax accountant first, as rules differ in different countries.
Hence, good debts can be described as debts that help you build wealth.
Of course, good debts are
only ‘good’ if they are for the right investment, the right house and the right car for your needs and repayment
ability. Many people are still paying off loans for failed investments.
Bad debts are loans or credit with
no tangible ‘asset’ or for an asset of little value – for example, taking out a personal loan for a holiday
is considered bad debt as you have not accumulated any wealth from it.
And taking out a loan for an 80 inch plasma
TV is also bad debt as it depreciates in value (like a car) but unlike a car, doesn’t help you build wealth.
Debt that arises from the over-use of credit cards is also bad debt as this debt typically arises from lots of small purchases
with no real value.
Hence, bad debts are those that don’t help you build wealth.
What debts
do YOU have? How many of these are good and how many are bad?
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