Is all debt bad? Should I clear all debt?
Debt is usually considered to be a bad thing. Financial specialists, professors, financial gurus and anyone dealing with personal finance will recommend against the use of any type of debt. They lecture and recommend, you settle all credit cards, pay off your home loan and to use every single cent available to settle outstanding debt. All the above is bad debt.
There is certainly a justifiable argument that if you don’t have any debt then you will be financially more stable but the one way most consumers can afford to buy homes and cars is through borrowing money and therefore making debt. Although it may be simple to distinguish whether a debt is bad it often takes a deeper investigation of certain conditions to determine whether a debt is indeed bad.
In most instances these financial specialists, professors, financial gurus are correct, but debt is a financial instrument, for example, a hammer is an instrument. A hammer can cause a lot of harm and damage if not used in a responsible manner and the same is with the use of debt if you don’t handle it in a responsible manner.
Intelligent real estate investors get excited to accumulate more debt when it comes to purchasing properties to grow their inherent wealth. Good debt makes you money by investing in income-generating assets which will increase your capital gains.
There's a real distinction between good and bad debt.
Bad debt in most instances gets used to buy items that will not produce any money for you in the long run.
A simple rule is that if your net value or future value is increased when you access this debt, the debt is then regarded as good debt. It's bad debt if it doesn't and you have no money to pay it for.
Although the majority of debt available to consumers like personal loans, revolving loans, vehicle finance, credit cards, one-month loans (loan sharks) falls into the category of bad debt, this is not because of the usually high-interest rate but because these types of debt create little to no revenue.
For example, a home loan or building finance to buy an apartment complex that will generate a passive income of 15-25% a year is good debt. If you lucky and plan, the loan will be ‘free’ if the money required for the monthly repayment gets paid by the investment themselves. Example, a tenant renting your property is covering the home loan repayment for you.
Take this into consideration: If you had to wait or save the money to buy that house or apartment block in cash, most average consumers would not have enough time in their lives to save for such a highly-priced property. The only way to get access to income-generating assets is to finance high priced assets through bank finance.
Experienced investors are aware that there will be security to pay off the finance with someone else’s money (the tenant) as the tenant will provide the monthly cash flow to cover the repayments.
Investing without debt is like cooking on a gas stove without any gas, the gas may be hazardous and very dangerous, of course, and one must use it with great care. The same goes for investments – you will see great results if you learn to use good debt.
Now the question you have to ask yourself is “Which of my debt is good debt or bad debt”?
The question one has to ask oneself is which of my debt is good debt or bad debt? Write down all your debts and assets in a list to assess your investments and liabilities. Consider selling or winding up some of the assets that are not generating a recurring income. Buy assets that generate a recurring income.
Property is a tested asset that generates revenue and is a commodity that does not exhaust demand. Other assets that generate revenue should also form part of your investment portfolio. If you have a comprehensive plan to replace all your debt with good income generating credit, you will be able to reap the rewards of a guilt-free, bad-debt splurge.
These may include purchases of a dream car, purchases of holiday homes or private-schooling for kids. All the monthly repayments will come from the extra cash flow one would generate from good debt investments.
Bad Debt examples
- Credit cards
- Payday loans (month to month loans)
- Personal loans
- Furniture and Store cards
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Contact us today and make use of our credit clearance services, if you want to approach financial institutions to buy a property and increase your good debt portfolio.