Many people think four letter word "debt" is very bad word. Since my parents also said to me so many times "Avoid taking debt at all cost and get out of debt", I thought debt was bad until I started to study investment. It is certainly true for some instances. However, it really depends. Debt is double-edged sword.
Debt can either help you or destroy you depending on how to use it. In order to understand what I mean, you need to understand difference between good debt and bad debt.
First, bad debt is the most typical debt people take. Bad debt takes money out of your pocket. In other words, bad debt is the debt you have to pay for it. Example can be credit card debt, mortgage for primary residence (your house) and luxury item (such as second house or boat). Most people are financial trouble because they have too much bad debt like these. No matter how much they work hard for money, these bad debts will suck all of their hard earned money. That's the reason why most people are struggle financially.
On the other hands, good debt actually makes you rich. Good debt is the debt that someone else will pay the debt back for you. Example can be a mortgage for investment properties. Since taking mortgage takes care of most of the up front money, you can invest in real estate in very small amount. Best part is that tenants pay the mortgage payment for you. People who knows how to use the good debt become richer and richer because your asset size will become bigger and bigger as your cash flow from your assets (investment properties) increase.
Moreover, understanding the debt is becoming critical especially after 1971 when president Nixon abolished the gold standard. Since then, value of the dollar has become less and less but so as debt. Right now, I personally want to take as much debt as possibly can to invest in real estate because of that reason. All the mortgage debt with low fixed mortgage I take will be effectively destroyed by inflation.
Many people are still claiming "Get out of debt!". It is certainly true that you have to get out of bad debt. However, if you understand how to use good debt for your advantage, the sentence most financial adviser used "get out of debt" does not make any sense at all. In order to financially successful, you need to understand how to use debt especially difference between good debt and bad debt.
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Published: 19 January 2011