Good Debt and Bad Debt

I have discussed here quite a bit lately about how you should eliminate debt to build wealth. As a general rule this is true, but we need to distinguish types of debt to be clear on this.

The debt that hurts people financially is consumer debt and overly leveraged debt. Consumer debt is money borrowed to purchase assets that do not appreciate in value and/or do not generate income. This category of debt includes all credit card debt, noncommercial bank loans, payday loans, any debt incurred to pay living expenses, and auto loans. All these loans are used to either pay daily living expenses or to purchase assets that lose value from the day you purchase them. This is bad debt. It does not generate income or wealth. It digs you deeply into a financial hole you will have great difficulty digging out of. It is a bad habit and a bad practice.

Bad debt consumes inordinate amounts of your income in interest payments. This debt limits your purchasing power and denies you financial flexibility and independence.

The more you can avoid bad debt the better off you will be. If you cannot afford something you should not purchase it. Better to do without than to go into debt to buy it.

Good debt can be debt incurred to buy an appreciating asset, such as a home, or a business investment that will generate income and wealth. Good debt is complex. Buying a home for example is not the best plan for everyone at every time in their life. It is beyond this article to analyze when it is the right time to buy a home. If you are contemplating purchasing a home educate yourself about the pros and cons of buying over renting given your income, your financial stability, your age, and your existing debt.

Beware of another form of bad debt – speculative debt. The classic example of speculative debt is to borrow money to buy stock. It is rather like borrowing money to bet on the ponies. You may win or you may lose – not a good basis for incurring debt.

Understand the difference between good debt and bad debt. Avoid debt like the plague. Be cautious about incurring good debt. Do your due diligence on so called good debt and make sure it is a relative safe and sensible investment.

The best debt is debt owed to you by someone with good credit. Wealthy people avoid debt, especially bad debt. They make fortunes loaning money to others. It is called investing. You will only have money to invest if you can avoid bad debt.

Wishing you success and prosperity,

Daniel R. Murphy
Helping People Learn to Build Wealth

Wishing you Success and Prosperity,

Daniel R. Murphy

Wishing you well,

Daniel R. Murphy
Educating people for building wealth, adapting to a changing future and personal development.