The oh so classic debate about debt! Most individuals hear the word debt and immediately associate the word with a negative feeling. The real question is, is all debt bad debt?
It is extremely important to understand the fundamental differences between good debt and bad debt.
What is bad debt?
Are certain kinds of debt bad such as Student Loans, High Interest Credit Cards, Personal Loans For Discretionary Purchases, Car Loans? Absolutely YES!
Why are these bad debts?
These types of debt are only taking more and more money out of your pocket versus putting money into your pocket! Here is a breakdown of my thoughts on each one of these types of bad debt:
- Student Loans: Does it make sense to go into debt to get a college degree? Eh, maybe. I would argue in the day and age we live in that you don’t need to have a degree to make something of your life. It is the thing that makes people feel safe though so I am sure many would argue against this.
- High Interest Credit Cards: As I have posted before, don’t go into debt with high interest credit cards. If you can’t pay off your credit cards in full every month while saving a significant amount of your take-home pay, don’t use them!
- Personal Loans For Discretionary Purchases: C’mon man! Are you serious!? Get out of here with that.
- Car Loans: Why would you ever buy something new or above your means just to try and impress others? I had a conversation with one of my tenants over the weekend after giving him the book Rich Dad, Poor Dad to read. I was talking with him about mindset and why it is important to invest and create different streams of income. He saw me pull up to the golf course in a 2008 Volkswagen Jetta. He inquired about how much I made and when I told him his jaw dropped to the floor. Just because I make a lot of money doesn’t mean driving a nice car is important to me. That $30k car is $2,400 a year before compound interest I would be losing out on.
Now the logical question would be, so what does good debt look like?
Types of good debt:
- Travel Rewards Credit Cards you can pay off in full every month. The key here is paying them off every month. If you can’t pay them off in full every month, don’t do it!
- Leveraging Other People’s Money (OPM) to invest in assets that put money into your pocket. An example of this I am currently using is my mortgage. With the house hacking strategy I am doing, I am earning $2,600 per month in rent. On a mortgage payment of $1,777, that is $833 I am putting back into my pocket each month while paying down my mortgage principal.
I hope you are now able to better understand the differences between good debt and bad debt. This was the single greatest mindset shift I had allowing me to drastically reduce the amount of time it will take me to be financially free and out of the rat race!