Debt is everywhere. On one side, debt is important for the economy because companies need it to expand. On the other side, debt can be misused and accumulated to the point where you owe thousands or millions of dollars with no idea 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 loans for 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 at the beginning of a recession. Purchasing equity in a business comes at the risk that the business may fail and go bankrupt.
It’s rare to find a multimillionaire with zero debt. Leveraging OPM (other people’s money) is a vital tool used to scale a company and it’s something most successful entrepreneurs use at some point in their journey.
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 liabilities. Some examples of bad debt include; cars, clothes, consumable goods, electronics, etc. (There are caveats to each of these. Some cars, clothes, classic electronics, or goods go up in value, however, most don’t)
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.”Unknown
To sum things up, bad debt is borrowing money to buy liabilities while good debt is borrowing money to buy appreciating assets. This piece of knowledge is one of the key factors that separate the financially literate and everyone else. Leveraging your money can be risky, but when done right it can change your life forever.