Get out of debt is a standard advice. However there are two types debt, good debt and bad debt. If you know the difference, you will find out that getting out of debt can be a bad advice within context. You will soon find out why.
Good debt makes you rich while bad debt makes you poor. Hence you need more of good debt, and none of bad debt.
BAD DEBT
Let’s start with the bad news – bad debt. Bad debt is debt you repay by yourself. It is debt you incur on liabilities. A liability is something that does not put money in your pocket, no matter how useful it is. A liability takes money away from your pocket. This means money is flowing away from you rather than towards you. Your car, consumer items, generator, furniture, TV, mobile phones, your home, anything you have to spend on but does not generate income.
When you incur a bad debt, you pay for it by yourself (you are on your own). This means that bad debt constricts your cash flow and drains your pocket. If you are an employee, It makes you poorer. It has a lot of baggage. It can damage friendships (borrowing from friends), make your life unbearable, lower your self esteem and can drag you down into bankruptcy if you grab more than you can handle. You want to get out of bad debt as fast as you can.
GOOD DEBT
Good debt is debt you incur but someone else pays for it, with an extra on top for you. This means you take the loan, someone else repays, puts extra money in your pocket and the item becomes yours. Too good to be true? I think I agree with you. This is one of the secrets of the rich. For example they buy a choice commercial property for a mind boggling sum paid for by the bank, they get good corporate tenants, and from the rent pay back the mortgage, make a profit and own the property.
They take the loan but the tenant repays the loan. They buy a fleet buses or cars for public transportation on loan, put it to service and from proceeds of the taxi or bus service repay the loan, make a profit and own the vehicles. They took the loan while the passenger pays it back. Good deal? Fabulous, if you know what you are doing
Hence good debt are debt you incur in acquiring assets. Assets put money in your pocket. This means that good debts make you richer. The more good debt you have, the richer you become. You cannot have too much of good debt. The more the merrier. If someone asks you to get out of good debt, you will be thinking – are you crazy or what?
Good debt pushes you to the top while bad debts drag you down. The bank is looking for people that can handle good debt. If they find one, they hold on to them at all cost. They give you sweetheart deals, lower your interest rates, give you free financial advice, celebrate your birthdays etc. Your banking officer becomes a member of your dream team and is at your beck and call. They know that you have the Midas touch. The question they ask you is – “How much do you need?. The item is the collateral.
If you are a customer that deals with bad debt, you will need series of collateral – letter from your employer, your pay slip etc. There is a limit to what amount you can borrow. They don’t trust what you want to spend the money on, so you are the collateral rather than the item. If anything goes wrong, they come for you, as the item would have lost much value anyway, neither does the bank want to get involved in auctioning TV, furniture, generators etc.
When you know the difference between good debt and bad debt, you know what type of debt to go for and what type to avoid. Bad debt makes you look cool before your friends and colleagues but makes your balance sheet look bad. It lowers your disposable income and makes you financially weak. You need financial education to be able to handle good debt. Good debts may make you look poorer at the beginning but when the cash starts flowing, the story is different.
Get out of bad debt and embrace good debt using the leverage of other people’s money. Do not get into good debt if you do not know what you are doing. The bank will check you out anyway. Start with investing in your financial education so that you can gain the license to cruise with other people’s money to wealth without getting your fingers burnt. You have to start small, gain experience, become good at it before you raise the stakes.
