There are many opinions, views and questions on debt these days. There is no such thing as good debt. Is all debt bad? You should never carry debt. Is there such a thing as carrying good debt? Debt ruins your life! Should you eliminate your debt?
Everyone has an opinion, view and most importantly questions when it comes to debt. I am a firm believer in the fact that there are three forms of debt! The true question is what forms are you carrying and are you doing anything about it!
Here are my definitions of debt:
1) Bad Debt: this is any form of debt that I deem as a liability and not building toward an asset. Any form of revolving credit such as Credit Cards certainly rate at the top of the list. This form of debt enslaves you to the financial institutions for life. This form of debt really takes your life and dreams away from you despite the fact that most people think the opposite.
2) Necessary Debt: I describe necessary debt as money you need to borrow in order to either build future wealth or benefit from today. This would include student loans, automobiles for transportation or a home to live in verses paying rent. The key to this form of debt is to live within your means. There is no reason to impress your friends or family with the top of the line brand new car or a house that is much more than you need. You need to live within your comfort zone without burying yourself in debt. I am a firm believer that you should strive to pay off your necessary debt as soon as possible. By doing so you are creating your future wealth in assets while creating liquidity for yourself no matter what the inflation or economy is doing.
3) Good Debt: Yes there is definitely good debt out there! Good debt is simply the use of other peoples' money that insures your success with a profit. Look at real estate as an example. There has never been a better time to purchase real estate. Home prices are at an all time low, interest rates are at an all time low and people needing to find a place to live is now becoming an all time high. This is the perfect scenario for someone looking to invest. You must be smart though. The key to any successful investment venture is cash flow. you MUST have a positive cash flow if you are to succeed. If you borrow $100,000 to purchase a piece of property with payments of $550 per month but can rent the place out for $1000 per month you have borrowed good debt while building your asset portfolio.
There is a much deeper level to each form of debt than I have explained here. Know the debt you are carrying and act accordingly. As with any financial decision, you should evaluate the pros and cons BEFORE making a move!
