Good debt and bad debt are classified by the projected outcome for which the debt was created. Without getting too ethically subjective here, I am going to give the following examples based on the idea that we are all able to pay our month to month bills and living expenses on our current income, and are not going through a financial hardship. Debts created from hardship are still considered a “bad” debt, but I understand what it is like to be hungry, desperate, and feel like you have limited options available in order to get back up on your feet. With financial hardship set aside and regardless of any other reason why you create debt, the outcome will result in one of two ways:
1. You will make money
2. You will lose money
Every time an individual is considering creating a new debt, it should be done in respect to this concept. Of course the majority of time it is not, and is one the primary reasons why so many people suffer financially. Simply put,
· Good Debt = Making Money
· Bad Debt = Losing Money
1. You will make money
2. You will lose money
Every time an individual is considering creating a new debt, it should be done in respect to this concept. Of course the majority of time it is not, and is one the primary reasons why so many people suffer financially. Simply put,
· Good Debt = Making Money
· Bad Debt = Losing Money
How Bad Debt Gets Ugly
Usually bad debts are created to satisfy desires of instant gratification. The causes that spark the desire for the urge to create gratuitous debt are what I narrow down to be the big three “G’s”:
1. Gadgets (tech toys, computers, home entertainment, etc.)
2. Gears (recreational vehicles, luxury vehicles, etc.)
3. Gifts (holiday or self-indulgent splurging because it’s a “special occasion”)
Don’t get me wrong, I am not saying it is bad to spend money on any of the above, but using credit to purchase them creates bad debt. The debt is bad, because the purchases are all self-gratifying, and unless they will be used in such a way to serve or gratify others in exchange for value, the burden of paying that debt falls solely on you. When this happens you are essentially signing a contract that will demand future payments plus interest until the debt is cleared. Everyone who uses debt understands this concept, but another way of looking at this is if your method for generating the funds necessary to make those payments as promised is to trade hours for currency, then what you’re really doing when you use debt is creating a contract for capital on the promise of X hours of your life. For more info on this concept check out “GOT YOUR MIND ON YOUR MONEY OR YOUR MONEY ON YOUR MIND?” See where I talk about slave spenders. This is where bad debt gets ugly, because all it takes is for you to fall behind on payments or miss a few, and interest will begin to multiply the amount of hours you are indebted, hence the term wage slave. At this point you are no longer working for yourself, you are working for the owner of your debts.
Leverage Good Debt to Create Opportunity
So what specifically makes debt, “good”? Well before I get into debt, let’s remember that money is nothing more than a tool, so when you use debt you are borrowing someone else’s tools! Please don’t tell me you’re the type who typically borrows someone else’s tools without good intention of returning them! I kid, but only to a degree because really this is a usefully realistic way of looking at debt.
Good debt is debt that creates capital leverage for you to finish projects today that will create financial gain later. Good debt is leveraging your daily/weekly/monthly expenditures in order to save in the long run and build good credit.
Usually bad debts are created to satisfy desires of instant gratification. The causes that spark the desire for the urge to create gratuitous debt are what I narrow down to be the big three “G’s”:
1. Gadgets (tech toys, computers, home entertainment, etc.)
2. Gears (recreational vehicles, luxury vehicles, etc.)
3. Gifts (holiday or self-indulgent splurging because it’s a “special occasion”)
Don’t get me wrong, I am not saying it is bad to spend money on any of the above, but using credit to purchase them creates bad debt. The debt is bad, because the purchases are all self-gratifying, and unless they will be used in such a way to serve or gratify others in exchange for value, the burden of paying that debt falls solely on you. When this happens you are essentially signing a contract that will demand future payments plus interest until the debt is cleared. Everyone who uses debt understands this concept, but another way of looking at this is if your method for generating the funds necessary to make those payments as promised is to trade hours for currency, then what you’re really doing when you use debt is creating a contract for capital on the promise of X hours of your life. For more info on this concept check out “GOT YOUR MIND ON YOUR MONEY OR YOUR MONEY ON YOUR MIND?” See where I talk about slave spenders. This is where bad debt gets ugly, because all it takes is for you to fall behind on payments or miss a few, and interest will begin to multiply the amount of hours you are indebted, hence the term wage slave. At this point you are no longer working for yourself, you are working for the owner of your debts.
Leverage Good Debt to Create Opportunity
So what specifically makes debt, “good”? Well before I get into debt, let’s remember that money is nothing more than a tool, so when you use debt you are borrowing someone else’s tools! Please don’t tell me you’re the type who typically borrows someone else’s tools without good intention of returning them! I kid, but only to a degree because really this is a usefully realistic way of looking at debt.
Good debt is debt that creates capital leverage for you to finish projects today that will create financial gain later. Good debt is leveraging your daily/weekly/monthly expenditures in order to save in the long run and build good credit.
