Good Debt vs. Bad Debt

By definition, the word debt simply indicates an extension of money to a person from a second party. It implies the intention to repay the monies lent at a future date as specified in the repayment terms. Although, this is an accurate description of what debt means it fails to indicate if all debt falls in the same category.

Purchasing anything will incur to the buyer a debt. In some cases, that debt is reimbursed instantly and both parties will conclude the transaction. However, in most cases the buyer will not have sufficient funds or wishes to forgo paying off the debt the same day. This is called financing where the buyer elects to pay off the debt on periodical basis. The true question matters only about what the buyer just purchased. The item could range from a house to a nice watch. Some of these items will depreciate over time and others will appreciate.

Good debt follows the purchase of an asset that renders passive income and bad debt causes the buyer to finance something that loses value faster than he is able to pay off the loan. A vehicle is perhaps the most common liability we all finance that does not return any money in most cases. A vehicle has routine maintenance and the occasional trip to the shop that costs money. A taxi driver turns this liability into an asset by actually making money from his vehicle. This is not a possibility for most people but it does prove that if you are not making money from a purchases, it is not an asset and not good debt. If there is no alternative to going into debt to purchase a vehicle, for instance, buy something inexpensive and perhaps even ten years old. The sporadic visit to the shop in many cases proves to be much less than paying a brand new car payment every month. The golden rule is to never pay interest on an item that loses value. Paying interest on something that appreciates is a step in the right direction.

Our society does not train us to spend our money in areas where it has the possibility of growing. Driving a new sports car, wearing the latest fashion trend and enjoying numerous toys including, boats, travel trailers and more are all examples bad debt even though it gives a false representation of your true financial picture. It is easy to believe that you are wealthy when you have many possesions. A great step is to write down what you own and what the bank owns, if the bank owns everything you are only fooling yourself.

On the other hand, good debt is not as flashy and you cannot wear it but it will reap greater rewards. Purchasing land, houses, businesses, stocks, bonds and more will all reap different returns depending on how that asset is set up. A house is bad debt if you do not make money for instance renting out a room or sectioning off the house to form an apartment. If the apartment pays for the entire mortgage than the owner resides there expense free. Turning a home in a tropical area into a time-share for additional income would be a great way to build passive income. Building on undeveloped land may return a profit or held for a future consideration. There are many ways to multiply your monies by thinking of how to turn liabilities into assets.

Now that we have established the difference in debt, it’s important to take that list of possessions you have. This includes what you own outright and what you are paying for monthly. The items that cost you money and do not appreciate nor earn anything put in one category. That is the category to start with initially. Think of different ways to make money from it. A 400 DVD collection is fun to watch but renting those out to paying customers is a start to a small business. After several months, the business could pay for your collection and income after that is profit. Profit to add to the DVD collection that not only you will enjoy but also return more money as your selection increases.

If making money was simple and we all automatically knew how to it would be a breeze. It takes time, patience and ideas that need to be explored and exercised. The rewards of concentrating on good debt and building a passive income from it will reap huge financial rewards. If someday you are unable to work wither physically or menatlly or perhaps you want to retire, the assets required from good debt will keep paying for themselves. A brand new car and other toys will not regardless of how many comliments you get from others.

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