We’ve heard it all before when it comes to debt especially from those people who are sinking and have no idea how to get out from underneath.
Some people think that debt can build over time like my friend Tony who had to pay back over $100,000 in debt, so it’s true.
Debt isn’t all bad but recognizing that any money owed is debt and it’s a debt that needs to be paid back.
Consequently you can also accrue debt faster than you can shake a stick at when you aren’t mindful of your finances. It’s just another reason I feel a budget is important for our financial health and what has helped us get out of debt.
What is debt?
We’ll keep this part simple and honest. You want to buy a mobile home that costs $20,000 and haven’t got the savings to buy it out right so you buy it on credit instead. Now you’re in debt, you are now obligated to pay for something you didn’t have the money for in the first place. There are two ways out of this, the first is to pay off the purchase and enjoy it in the mean time. The second is to sell it off if you can’t make the payments.
Along with the initial debt, interest has to be paid. Making money is what a credit company or bank does. I try to buy as many things with cash as possible which keeps my interest payments at zero. I gain extra hours at work and save for a purchase, it’s the way I’ve operated since a young boy with a paper route.
Good Debt vs bad debt
There are different kinds of debt and not all debt is bad and I’ll tell you why. The more obvious everyday debt that a lot of people get themselves into can be considered bad debt.
Those types of debt include consumer debt from spending too much on a regular basis and yet have nothing to show for it. Eating out, take out coffee, clothes shopping, grocery shopping etc if you are not careful can put a ding in your budget and dig deeper into the debt hole. The reason this is bad debt is that the residual value of the product or service is either worthless or just worth less afterwards.
Eating out multiple times a week isn’t just bad for your diet, It’s bad for your wallet too. After the product has been consumed there is nothing left. If you went into debt because of eating out then that would be considered bad debt.
Even something as essential in modern life as a car is considered bad debt. The car is never worth what you initially paid for it and it costs you every week or month to keep it if you bought it on credit.
This is where bad debts gets worse; when you buy any item on credit you also incur extra charges through the form of interest making the product even more expensive. Financing an item over a long period of time can also lead to trouble, increasing the possibility that you end up still paying for a product after its useful life has expired.
If you acquire too much debt and it exceeds your assets then you will be in negative net worth. Taking on too many debts can also lead to being liable for too many debt repayments. You keep “Robbing Peter to pay Paul” as the saying goes.
At this point a lot of people can become frustrated and overwhelmed with the bad debts that they have built up. Take control of your finances and minimize what you think you need. It’s surprising how little you actually need compared to how much you want.
Now I’m not all doom and gloom, there are good debts too. I can remember for the longest time my parents telling me I should invest in “Bricks ‘n’ Mortar” or property to everyone else.
Property values tend to increase over your lifetime and therefore represent good debt even when you have to borrow money to pay for it. There are instances when that grand purchase can be the mill stone around your neck, such as in the event of an economy nosedive. If you suddenly can’t afford that mansion because of job loss that good debt turns bad.
Educating yourself and improving your income potential by getting a loan to further your education or training is also considered good debt, as more educated people tend to work in higher paid fields.
Obtaining debt to increase your income can be a sensible choice, after all, you are taking what you have now and increasing its future value. Even in this day and age though, educating yourself and expecting a great job isn’t as easy as it sounds. There are plenty of stories about students with a lot of OSAP and consumer debt but can’t find jobs.
So, bad debt and good debt is easy to distinguish? Not so, remember the car above, there are plenty of old muscle cars that are worth far more than they used to be because they are now considered classics. One thing I can be sure of, biting off more than you can chew isn’t going to help matters when you need to enter the world of debt for a reason.
We have debt, it’s called a mortgage and so far due to property value increases and hard work paying it off will turn out to be a good debt even though we have the money now to pay it in full. It could have been a lot worse, but when we bought it we were a little on the conservative side and opted for something in the medium range rather than going for the mansion.
Most countries have debt clocks showing the general public how bad the national debt is and the speed at which its climbing and in all cases it’s fairly alarming. There are no personal debt clocks, but essentially you can interpret your situation into that same scenario.
When you get into debt, no matter how small an amount, the debt clock is already ticking. Your mission should you choose to accept it is to turn back the clock or reset it zero by paying off debt faster, by minimizing the use of credit or paying it off completely.
I personally use credit cards and they are paid in full every month so my debt clock only consists of the remaining mortgage. Tic Toc, this message won’t self destruct in the next fifteen seconds.
Would you consider anything else to be good or bad debt?
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