Do you ever feel like the rich are keeping a secret formula from the rest of us? Well, get close, because the richest people's best-kept secret is one word: debt. Yes, if you are smart, you can make money even if you don't have any money. Yes, let us understand good debt vs bad debt.
Just think about how COVID19 and Economy hurt so many businesses, and how much harder it was for those with a lot of debt. Oh, you're talking about BAD Debt. BAD Debt is bad, it says so right in the name. I'm talking about the kind of debt that makes dreams come true and opens doors. What? Now there are good debts and bad debts?!
Good Debt vs Bad Debt
Oh, and of course there are "good debts" that are worse and "bad debts" that are better. With stories about national deficits and credit card balances dominating the news, it might seem like debt is a fairly new thing. But people have been using debt for a very, very long time.
In ancient Mesopotamia, writing was made so that people could keep track of their debts. In fact, people have been in debt even before money was invented. Try to figure that out! David Graebner of the University of London says in his book "Debt: The First 5,000 Years" that it was debt, not real money, that kept economies going for thousands of years.
What is debt?
Debt can be anything: money you owe, a credit card balance, even student loans. But debt can also be something that adds to your wealth or business.
If you understand the difference between good debt and bad debt, you will find that the two debts you face today are not as different from each other as you may think.
When you borrow money for the first time, you are borrowing money to buy something.
This something could be a car, a house, a piece of equipment, a degree, or whatever else you need to achieve your life goals.
This type of borrowing is considered to be ‘good debt’ because it will ultimately help you reach your goals.
The second type of borrowing is when you take out a loan or a credit card to pay off a previous loan or debt.
This type of borrowing is considered to be ‘bad debt’ because it is used to eliminate debt, not to achieve a goal.
Now, what if you have debt, but you don’t know whether it is good or bad?
It is likely that the debt is bad, and this is why you are struggling to pay it off.
However, it may also be possible that the debt is good.
If you can prove this, you can stop feeling guilty about it and focus your energy on paying it off.
To prove that a debt is good, you must determine if you will actually use the money to earn money that you can put back into your business.
If you can’t show that you are going to use the money to earn more money, then you should still pay it off because you will never be able to earn enough money to pay it off.
On the other hand, if you can prove that you will use the money to earn more money, then you can claim that the debt is good.
Types of Debt
Debt 1:
It's when you get a credit card and spend more than you can afford. You get into debt, and then the banks start charging you interest. In other words, the bank not only charges you for what you owe, but also adds interest to that amount. This makes you feel like you have even more debt, so you pay more interest.
Debt 2:
It's when you take on debt to make an investment. Let's say you buy shares in a company and those shares go up in price. You can sell that stock at some point. You made money from the investment, and the price you paid was what it cost you to invest.
Debt 3:
It's when you take out a loan to buy something. When you borrow money from the bank so you can invest it, you usually have to pay interest. There are times when it makes sense to borrow money to invest, but when you do, you need to make sure you're borrowing the right kind of money.
Debt made civilization possible
Debt really made civilization possible because it made it easier to keep track of who owes what to whom than bartering. And the idea that we should run away from our debts and live a simple life in the woods might be as old as society itself, even though it seems like a new idea.
Graebner says, "People just started running away and joining nomadic bands, and every so often, kings would cancel people's debts." We have such a love-hate relationship with debt, and it's not hard to see why. It can help you reach your goals much more quickly. For example, you could use a small business loan to open your dream bakery or a student loan to pay for graduate school.
But when things get bad, we tend to become the main character in our own version of "Naked and Afraid." The common belief is that you should only take on good debts for things that you think will get more valuable over time, like a house or a small business. Like a trip to Cancun or a nice dinner, bad debts don't pay for themselves.
Most of us have at least a few "bad debts," and most experts agree that these debts make it harder to build wealth. But after that, things start to get hard. You may have heard people in the media take strong stands on how "good debt" should be used, why it exists, and even if it does. Robert Kiyosaki and Dave Ramsey have been two of the most vocal people in this debate in the past few decades.
What are some signs that you should stay away from debt?
If you want to know if it's a good idea to borrow money, there are a few red flags you should look for.
You should be sure that the interest rates are fair.
You'll have to pay a lot of interest if you borrow $10,000 to invest in a car.
Before you borrow, it's usually a good idea to keep this in mind.
You should also make sure you don't push yourself too hard.
If you need to borrow a lot of money to buy a costly car, you might be putting your credit at risk.
This means that you will lose a lot of money if you borrow a lot of money.
Instead of taking out a loan, you should look for other ways to get the money you need.
