Good Debt vs Bad Debt
Debt has many negative connotations associated with it. In most cases this would
be true as many people purchase “things” with debt rather than investments. If
the value of the item does not increase over time and you have paid for it via a
loan, then this is bad debt.
Bad debt is something must be taken care of and not taken out. A debt for a car
or holiday is not a great way to progress forward. If you take out a loan to buy
a holiday or car you are then going to pay it off for the next 5-10 years or
however long your personal loan is. You will end up paying far more, because of
the interest charges and fees.
Ways to help with temptation is to remove and cut up all credit cards or store
cards. Stop any credit lines that you have. A good way to pay off these debts is
to pay the minimum monthly payment on all loans. Then as the smaller loan is
wiped off (e.g. the store card) then put the minimum payments you were making
into that, into the next smallest loan. Eventually all your debts will be gone
except your mortgage. At this point it’s usually advisable to start investing.
Good debt is a loan for assets, an asset that increases in value faster than the
cost of loan, or the cash flow pays back the loan and more. Some examples of
this are high capital growth properties. If a property doubles in value in 10
years and the home is rented, so it covers some of the keeping costs, then this
property will eventually make you more money than the loan cost you.
A positive cash flow property is also a great asset. This type of property will
cover the cost of the loan and more and hence is a good debt. Debt is not all
bad and it can be used to create a great wealth if used properly.