Focus on ‘Good Debt’

Focus on ‘Good Debt’

One of the biggest problems and one that keeps most of us up at night is Debt.  That is why I wanted to talk about it this week.

In reality, if you could avoid getting into debt that would be ideal. Debt stresses us out and stats indicate that personal debt on average is increasing.

But most of us can’t avoid it mainly because we don’t have the cash or finances on hand and therefore we will be in debt sometime in our lifetime.

But that is okay as long as we understand debt.

So what kind of debt we should get into and what kinds we should avoid is something we need to know.

We have heard of the terms ‘good debt’ and ‘bad debt’.  But do we really understand them?

So let’s begin with Bad Debt. 

Basically, bad debt is borrowing money to accumulate depreciating assets.  

For example, new cars, boats, furniture, clothes, etc., fall into the category of bad debt because they all depreciate in value once you have bought them and taken them home.

In other words, if it does not go up in value or generate income, then you should not borrow money to purchase it.  Pay cash if you can!

Credit card debt also falls into this category, since we use it often to buy depreciating assets.  Interest rates are much higher than loan rates and adding to this debt is so easy.  

Avoid this debt as much as possible and pay it off as quickly as possible. 

Now Good Debt, on the other hand, should help you generate income and/or your net worth.

It is based on the old adage ‘it takes money to make money’.

Borrowing money to buy real estate, stocks and bonds, to improve your education and technical capability, or to purchase a business are all examples of good debt.  Why? Because your net worth and your assets should increase in value over time.

For example, if you borrow money to purchase rental properties then those properties should increase in value over time and you should generate rental income.

Same for borrowing money to buy your home – its value should increase over time and you will build equity that can be used to acquire more assets.  Focus on good debt.

As a farm girl, I learned from my parents early on about good debt and bad debt.  We bought more land to increase our assets and income. We bought more farm equipment because we needed the equipment to be more efficient and to work more land.

But we paid cash whenever we could to keep our bad debt to a minimum.

Later in life,  Robert Kiyosaki reminded me about building assets, and specifically about acquiring real estate income generating properties.

“I use debt to buy assets. Most people use debt to buy toys and liabilities.”  – Robert Kiyosaki, Author and Businessman

I followed his advice and from my business profits, I strategically built a 2 million dollar real estate portfolio that generated income and appreciated in value.

And it all came down to having an abundance mindset (rather than a scarcity mindset) and to understanding the difference between good and bad debt and using that knowledge to make the right decisions.

So, my message to you is to focus on good debt. 

If you would like to learn more about my freedom formula, I would love to chat with you, so feel free to book an appointment here.