Good VS. Bad Debt

Credits to Dan Lok, the king of high-ticket sales

Debt is everywhere. On one side, its important for the economy because companies need it to raise money in order to expand. On the other side, debt can be miss-used and accumulated to the point where you owe thousands or even millions of dollars with no idea of how you will pay it back.

10% of borrowers in the world use debt to get richer – 90% use debt to get poorer”

Robert Kiyosaki

First, let’s talk about good debt. Good debt has the potential to raise an individual’s net worth. It is directly related to the saying that it takes money to make money. While this may not be 100% true especially in today’s world with the internet, it still applies for the most part. Good debt is a result of taking a loan to purchase an appreciating asset or an asset that generates net positive income. Some examples of using “good debt” are spending on; Real Estate, education, business ownership, and other assets that can be flipped for a profit or that yield a profit later on.

While each of these examples generally leads to a net positive income, they do come at a risk. In Real Estate, the property you purchase could have hidden damages, or you may have purchased a property in a filtering neighborhood without knowing it will depreciate the value of the property. Purchasing equity in business comes at the risk that the business may fail and go bankrupt.

On the other hand, it’s hard to find a multimillionaire with zero debt. Leverage from outside sourcing is a vital tool used to scale a company and it’s something most successful entrepreneurs use at some point in their journey.

This is why some argue that there is no such thing as good debt. Regardless of whether or not this is true, using “good debt” to make a purchase on an appreciating asset will always be better than bad debt.

Bad debt is sacrificing your future day needs for your present day desires”

Suze Orman

Bad debt is when you borrow money to purchase depreciating assets. In simpler terms, borrowing money to buy something that won’t generate income or go up in value is considered bad debt, and it is not recommended that you go into debt to buy these things. Some examples of bad debt include; cars, clothes, consumable goods, electronics, etc.

Determining whether a debt is good or bad sometimes isn’t so black and white. It can depend on an individual’s financial situation, as well as other factors.

“Most people’s goal is to be debt free. My goal is to have hundreds of millions of dollars in debt.”

To sum things up, bad debt is borrowing money to buy liabilities while good debt is borrowing money to buy appreciating assets. This knowledge is one of the key factors that separate affluent individuals and everyone else. Leveraging your money can be risky, but when done right it can change your life forever.