What Is Debt?
Debt is a financial obligation that we must fulfill in the near or distant future. That is, we buy something today to pay for it in the future. Buying a car in installments, taking out a loan, and the like are examples of debt.
How To Distinguish A Good Debt From Bad Debt?
Do you think debt is good or bad? Is debt good at all? Many financial advisors believe that there is no good debt and there is no way to determine good debt. They all even advise you to clear your debts as soon as possible and avoid debt and borrowing as much as possible. But is this always possible? Is this the best advice?
In this article, we intend to counter this argument. When debt is actually a good thing, it does not mean that it’s always good to be in debt, but a certain debt, under certain conditions, and sometimes better that does not exist at all.
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At the beginning of the discussion, I need to explain that, in the opinion of Mr. Robert Kiyosaki, the author of The Rich Dad Poor Dad, debt comes in two forms. Good debt and bad debt.
What Is Good Debt?
According to economics, good debt is a debt that can have a higher interest rate than the interest paid on it.
In fact, good debt; is a debt, which has a low-interest rate and is used for investments such as buying a house, turnover required for a business, or a special investment with a reasonable income.
Good debts are the ones that make money for you. These debts are actually a kind of investment in a sector so that you can pay off your bad debts from the profit of that investment.
If your debts are not yet high enough to get out of control, it is best to learn how you can pay your own salaries and create new income models for yourself.
So debt is not a bad thing and can even pave the way for us to get rich. So we need to gain financial intelligence and knowledge to understand how to get into debt properly and how to manage debt.
Good debt is a debt that:
- It benefits you.
- It generates a revenue stream.
- Adds to your assets.
- It is profitable for you.
So develop good debt!!!
What Are The Bad Debts?
We can all get into debt for a variety of reasons. For example:
- To borrow a house, we borrow money from friends and relatives;
- We have little money to buy tools and we borrow from others;
- An unexpected thing happens that we do not have enough money to cover;
- We take money from others to finance a business;
- And dozens of other reasons…
Now there are some debts that the creation or continuation of which can eventually cause financial crises. In general, any debt that results in less than what it owes is bad debt.
For example, some people go to another loan to pay the arrears of a bank loan or to settle it. In most cases, this only changes the nature of the debt and even increases the number of debts in the long run.
Undoubtedly, such debt is considered a bad debt and keeps the person in debt and may even lead to the accumulation of debt for him. For this reason, we suggest that you answer this question whenever you want to create debt for yourself:
Is the result of this debt greater than the benefit it owed us?
If the answer is no, try to reconsider your decision to create that debt by thoroughly examining the aspects.
Bad debt is a debt that:
- It will cost you money.
- It will do you a disservice in the long run.
- It takes money out of your pocket.
So settle your bad debts as quickly as possible.
Let me complete my explanation with an example. You have received a loan to use in investing. You pay a 28% interest annually while you can get a 48% annual return on your investment. So this is good debt. You can have such debts as much as you can.
But if you have not been able to get a good interest on the loan you received or you have taken out a travel loan, this is a bad debt that you need to pay off quickly.
Here Are Some Other Examples:
I see people who are indebted to those around them and do not take any positive action to pay off these debts, until the number of these debts increases and causes trouble. It damages the reputation and personality of these people and questions their credibility.
I see people who have different debts in their business. Some of these debts are very small. Or some of these debts cause the credit of these people to be questioned, but they are still not willing enough to pay the debts and have no plans to settle these debts.
I see payers, although they receive salaries and benefits on time every month, they are still unable to pay their arrears. If they know they are adding more to their past debts than before, they still have no plans to settle with the debtors.
Why do you think some people do not pay their debts?
Why do some people not make an effort to end their debt despite having a decent income?
We have two types of debt. Good debt and bad debt. What most people do not know and often find themselves in a bad debt hole is that they do not know the difference between good and bad debt.
But bad debts are the ones that take money out of your pocket and make your pockets more and emptier. For example, debts to buy a car or clothes or electronics or a house, etc.… So the issue is not about debt. It’s a matter of knowledge between good debt and bad debt.
Do you know of any other situation that separates good debt from bad debt? Share them with us.
“If you have any feedback about what is bad and good debt that you have tried out or any questions about the ones that I have recommended, please leave your comments below!”
NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.