Debt, is it Good or Bad?
Everyone uses debt, it’s part of our culture and it’s even ingrained into our habits. Just Don’t Let Debt Keep You Broke!
Debt is a part of all our lives.
Debt can be good as it allows you to get something before you have the money to pay for it.
It can be bad simply because it forces you to put more of your income over time to pay for the purchase.
What you are not often told is that the rich generally only borrow money to purchase things that will make income, or capital growth.
There is another aspect to this. These type of purchases are almost always under some form of business structure which means that any interest charged from the debt becomes tax deductible.
This puts a wealthy person an great advantage as they are getting tax deductions on debt that is earning them income, whereas you and I just pay off debt for ‘stuff’.
Seems fairly obvious, but lets look at the outcome of these two different ways of using debt:
- An everyday consumer buys stuff, that essentially has no lasting value, and pays more for it over time. The end result is they are financially worse off.
- A wealthy person uses debt to purchase systems/investments that make money for them and any interest that is charged is deducted from their tax, reducing the income, and hence the amount of tax they pay. The end result is that they are financially better off in multiple ways.
I want you to get your credit card out. Have a good look at it. I bet its interest rate is pretty high. Is it something you pay off in full by the due date, or something that has a balance carried over month after month after month? If its the later then that little card is just one thing that is holding back your ability to generate wealth.
Got a car loan? Its should have a lower interest rate than your credit card, but its balance is likely much larger. The end result is the same, it is holding back your ability to generate wealth.
Remember back to the Steps to Improve Your Finances Guide where we advised you to pay off credit card debt?
To get the maximum benefit paying of debt should be done starting with the highest interest rate debt first, then lower rate debt loans etc.
This helps you to remove the debt restraints that are harming your ability to generate wealth.
This is what we call bad debt.
The wealthy know that good debt is debt used to create income/wealth. Which is how they use debt, to their advantage not their disadvantage. You can do this too!
