I am an advocate of avoiding debt at all costs, especially business debt… Debt is a way to enslave yourself to the “system” that keeps you dependent on your crappy job so you are forced to comply (which is another reason why you need to start a business), but there are forms of good debt you should know about.
First, bad debt is debt that has a high interest rate and typically is owed on a non-appreciating asset. These assets are usually consumer junk (furniture, random items you buy with credit cards, etc.), cars, RVs, boats, etc… Basically, any asset that loses value. Going into debt over these things is not a smart financial move and should be avoided at all costs.
Personally, I buy my cars with cash. How do I do this? I have a separate checking account that I put $300-500 a month into for a new car purchase. I act as if I have a “car payment” even if I don’t basically. After 3-4 years, there will enough money in that account to purchase a car CASH. Rinse and repeat!
On the other hand, good debt is debt that you can LEVERAGE to increase your wealth. What do I mean by this? Good leveraged debt is debt you can use to purchase an appreciating asset with a low-down payment in hopes that it will increase in value significantly in the future which you would eventually be able to sell off for a PROFIT. For example, a piece of rental real estate that you can purchase for $100,000 that only requires a $10,000 down payment is a type of debt that can generate monthly cash for you. If you go into debt for $90,000 on this property with an interest rate of only 3%, your monthly payment would be like $600. You can then rent it for $900, which would result in a $300 a month profit PLUS the house will appreciate in value over 10 years. THIS IS GOOD DEBT.
I utilize GOOD DEBT to increase my wealth over the long term. I do not find mortgages on rental real estate to be risky. Instead, they increase my net worth and provide monthly cash flow outside of healthcare. My goal is to have 10-15 high cash flowing properties in the next 2 years that generate $5,000-$10,000 a month in profit passively. This is leveraging debt to your advantage!
I don’t mind using good debt to increase my overall wealth and net worth. Most millionaires use leveraged debt to increase their wealth but AVOID bad debt that does nothing for them. I know real estate developers that will take a $1 million loan out to develop some land that they then turn around and sell for $1.8 million 8 months later. THAT IS LEVERAGING GOOD DEBT! So, avoid dumb bad debt and only take on good debt that will make you more money in the future!
2 Responses
Hi Justin, this is a great article. My husband and realized this concept every early on in our life. We both working with salary of 50k per year, we started with buying a small home, as soon as we save enough for down payment. We would buy another house. Fast forward 10 years later, we now own over 30 + properties, and millions of “good debt”.
Good for you!!!! You saw the “light” basically! This is how really wealthy people become wealthy. You could probably call it quits if you wanted too at this point.