A lot of people think that debt is something that’s bad but after reading Rich Dad Poor Dad by Robert Kiyosaki, I learn about the difference of good and bad debt.
This is a key topic to understand in personal finance.
Bad debt is when you make a purchase that you have to get a loan for, but that purchase doesn’t make you money; it actually is a liability. Good debt is when you take a little bit of risk getting a loan but other people are paying for it.
Good Debt Example
A perfect example is a rental property. You can put 20% down and buy a rental property. Your tenants are paying you rent payments that will hopefully covered your mortgage and then some because you always invest for positive cash flow. This way, you have your principal and your interest payments covered by other people.
Bad Debt Example
A car for example, is bad debt because it doesn’t make you money. Some may say there is a grey area between good and bad but let me explain. Buying a NEW car is one of the things that I do not recommend because as soon as you drive of the lot it depreciates about 30%. Now, it’s important to understand a NEED vs WANT, in society a lot of people need cars to get from point A to point B, and many take out a loan for it. That is fine if you need a car, but don’t go getting a brand new Cadillac or BMW and have a car payment of $600. As one of my mentors, Adam Carroll, once said, “The new car smells goes away, the car payments don’t.” One of my first cars was a 2009 Honda Civic, I bought it in 2013 and still continue to drive it around 4 years later. My car payments were around $220 and I payed it off on October 2016. Now I don’t have a car payment 🙂
Another example of bad debt is credit card debt. Sometimes credit card interest rates are between 15%-25% APR. That is ridiculous! If you are a millennial attending college, please don’t fall for the “Sign up for a credit card, and get a free T-Shirt or Pizza.” Having a credit card without the right knowledge on how it works can actually build bad habits and you can spend more than you can afford. Pay off that credit card every single month!
Something that I have learned about studying successful people and studying about financial freedom, is that the rich buy assets that give them cash flow. The rich buy good debt, the middle-class buy things with bad debt.
One of the best ways to find out if something is good debt or bad debt… “ask yourself, will getting this loan put money IN my pocket or take money out of pocket every single month?”
I hope this gives you a better perspective on the 2 different types of debts.
What are other examples of good debt or bad debt? Let me know in the comments below!
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What is FreeBy26?
This blog is targeted to people, especially millennials, who don't want to conform with what society expects from them. I want to inspire my readers to take control of their own life, their own finances and achieve the life of their dreams.