Debt is often perceived as the devils sidekick, the slow and painful process of spending money in a bad way that makes you pay it back later, often with unbearable amounts of interest.
However, the fact remains – debt can work both for you and against you. There are two kinds of debts, good debt as we call it is used to grow your net worth and hopefully make you money through investments and purchasing items that will appreciate in value. Bad debt is money spent on items that do not appreciate, instead losing value – like a new TV for instance.
Bad debt is often referred to as consumer debt, or consumer credit. It refers to the mindset of a consumer, wanting to spend money on items now regardless of whether their situation will allow it. This means that our impulse buying tendencies can be fulfilled via the pesky like piece of plastic we call a credit card.
Good debt however is smart debt (when used wisely). If you were told that an antique was worth $5000 but you found it for $2000, purchasing that item on credit isn’t such a bad thing if you believe you can in turn sell it for $5000 and recover a profit of $3000. It gives you access to money making investments that would otherwise be unattainable.
Before I go on, I need to clarify that good and bad debt decisions are not black and white. A good decision can be a bad one if not properly researched.
The three areas to use good debt
Direct investments such as shares, property, antiques, art work can all stand to make you a return. They too are not immune for losing you money, though they often are labelled as the stand out performer of how you can make more money.
Investing in your own business is also classified as a good debt as it has the potential to be used to in turn make you more money. It can be used to expand or juggle cash flow to grow your stockpile of money.
Education in yourself is also a good debt. Learning new trades, techniques and theories have the ability to grow your education and in turn your potential to earn. With more knowledge comes more power to earn.
The rule to remember about good and bad debt
If you are going to use debt to fund something, consider whether it is a good or bad debt. If the item is going to appreciate in value and one day be worth more – it is a good debt.
If the item you want is simply going to lose value and fulfil a brief moment of temporary happiness, it is likely a bad debt.
This isn’t to say we cannot ever buy a TV, though just consider whether you should have saved for it instead or perhaps whether you really need the top of the line when you are likely going to replace it in 3-5 years anyway.
Understanding the true purpose of debt means you are now 2 steps ahead of the next consumer.