Good Debt vs. Bad Debt
Welcome to 2013!
While many of you are happy to begin a fresh, New Year full of possibilities, others of you are losing sleep over your big, credit-card bills from holiday spending. In fact, a survey done prior to the holidays by MyFICO indicates that credit card debt is a huge worry for most consumers stating, “¼ of survey respondents will need more than three months to pay off their 2012 holiday expenses, compared to 18% in a similar survey conducted in 2010.”
If you are part of this group, stop feeling sorry for yourself. Instead, do what it takes to pay off your bills and figure out a plan so that you stop acquiring bad debt the rest of the year.
What’s the Difference Between Good and Bad Debt?
Yes, as some of you new to Rich Dad and Rich Woman may not know, there is such a thing as good debt. (It’s not always a four-letter-word that can make your life miserable!) While the credit-card debt you may have now from holiday spending is bad debt, good debt will most likely be part of your plan to reach financial freedom. And it’s easy to tell the difference depending on what the debt is for…
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Bad debt is when you borrow money to purchase clothes, shoes, a car, and other things you consume.
Once you purchase an item, that’s it. You may get instant gratification and enjoy your new purse, truck, big-screen television, etc., but your purchase does increase your cash flow. You must pay the debt yourself. This type of debt takes money out of your pocket (liability).
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Good debt is when someone else pays it for you.
This is when you use other people’s money (OPM) to purchase assets. For example, if you get a loan to start a business, you use the positive cash-flow from the business to pay off the loan. Or, when you purchase a rental property with a loan, your tenants’ rent covers your loan payments.
Unlike liabilities, these purchases are assets because they put money in your pocket – when the loan payments are made and there is money left over from your investments, you create positive cash-flow.
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Make a Good Debt Resolution.
If you are tired of struggling with bad debt, it’s a New Year and the perfect time to make changes in your life. Remember, as I say in “It’s Rising Time!”, all borrowed money is not bad debt…
“It is what you do with the money that you borrow that makes all the difference.”
And if you have no idea how to obtain good debt, it’s time to start your financial education. Acquiring good debt is just a matter of learning how to do it and taking action. Begin with the Triple A Triangle™ of Aspire, Acquire and Apply. Set goals for this year and the future, get the knowledge you need and take action on what you learn. Then, next year at this time, maybe you won’t be paying off liabilities but cashing checks related to your assets!
What one thing are you going to do today to increase your education about good debt today?
Do you need help turning your financial situation around and starting your journey to financial freedom? Please check out our free, financial education community here.