Hello Friends, I hope all is well with you! We are back to primetime blogging with another interesting topic – good debt vs bad debt. Mr. Nahas, there is a difference between the two? Yes, there is a difference between the two, and I want to explain it. It’s important to know the difference between the two and how to utilize them to grow your wealth instead of decreasing it. With that being said, let’s dive right in!
Just to recap what debt is, Debt is something that is owed or due, usually money; there are usually two parties involved, the debtor and the creditor. The creditor is the one lending you money or whatever you agreed upon, and the debtor is the one that receives the money or whatever you agreed upon. Depending on who you talk to, they might have a different viewpoint on the difference between good debt and bad debt.
On one hand of the spectrum, there is a belief that all debt is bad debt, whether it’s for investments, education, purchasing cars, etc. According to this belief, an investment loan would be equivalent to a car loan; there is no distinction between good debt and bad debt. Some people would just rather not have any financial obligations to their name, even if they know that some debts can help them build wealth faster. There are pros and cons to this belief. One major benefit is obvious – no debt. You won’t have to stress about car payments, investment loan payments, or any type of financial obligation because you won’t have any or, at least, you won’t have a lot. One major con to this belief is that you won’t be able to utilize the bank’s money to fund your investments and grow your wealth faster. It might take you longer to fund investments but when you do, you won’t have financial obligations. It can go both ways.
On the other hand, there is a belief that there is a difference between good debt and bad debt. Good debt is a loan that you can use to your advantage to be able to own an asset without having to pay all cash for it. You are essentially using the lender’s money to purchase an asset that provides you income. This way would result in a much faster approach to gaining wealth than trying to pay all cash for the investment. There are cons to this as well. The major con to this is that you would have a financial obligation to pay the loan whether or not your investment is giving you income. For example, times are uncertain now, so if your investment is not performing well, you will have to pay the debt no matter what or risk having the investment be taken away. Again, it can go both ways.
Mr. Nahas, what is your point of view? Do you think there is a difference between good debt and bad debt? Good question! I think there is a difference between good debt and bad debt, and I feel like it’s important to go over which debts are considered good debts. I consider good debts as debts that can help you achieve wealth. You achieve wealth with good debts by buying assets that can generate your income and consistent returns. There are a couple of main debts that I consider good, but it’s important to mention that you need to do your research on the investment thoroughly. You need to formulate a thorough business plan, you need to crunch the numbers to make sure the numbers make sense, you need to do market research to make sure that your investment is needed, and you need to analyze all possible outcomes. Good debt is only considered good debt only if you know how to use it properly, if not, it can easily turn into bad debt and destroy your wealth. I want to emphasize this again. You need to do research on the investment thoroughly and make sure you have all your ducks in a row or else the debt is considered bad. In my opinion, there are two good debts out there – an investment home loan and a business loan.
Investment Home Loans: As the name implies, this is a type of loan that you get when you purchase an investment home. These loans enable you to use the bank’s money to buy an asset (the property) and create you a constant income stream (rental income) but only if you use it correctly. You need to do thorough research on the property, the tenants, the numbers, etc. That’s the main factor to whether or not this type of debt is considered good or bad. If you don’t do research and just buy any random investment home, chances are that you will end up having bad debt on your hands and instead of having an income stream, you will have a money pit on your hands.
Business Investment Loan: As the name implies, this is a type of loan that you get when you want to open your own business or finance business related activities. Again, this loan enables you to use the lender’s funds to create your own asset (your business) and to create your own income stream (profits from the business). I want to mention again that you must have an in-depth business plan, a good or service that people want, a market that will allow you to have that good or service, and many other things. The main point I’m trying to make is to research the business idea thoroughly before you apply for a business loan.
I think I’ve mentioned it enough, but I want to say it again. I considered investments as good debts but only if you use it correctly. You must do in-depth research on the investment and know how to manage money before you can consider this a good debt. If you can’t manage the investment money or if you don’t do in-depth research, this can easily turn into bad debt and destroy your wealth.
Bad debts can take many forms, but I see it as any debt that fails to provide you an asset and income. It’s important to mention that when I say asset, I mean something that helps you build wealth and create you a stream of income. A lot of people might view cars as an asset but unless you are renting it out and making an income from it, you have a bad debt or liability. Here are some of the things I consider bad debts or liabilities:
Auto Loan: This is a type of loan that you take out to purchase a vehicle. If you purchase a vehicle for personal use, it would be considered a liability because it’s not generating you any income or providing you a way to build wealth; it’s actually doing the opposite. You are paying to own the car and not only that, the car is most likely depreciating in value. For example, you might buy a car that is $30,000 and by the end of the car loan term, it might be only worth $10,000. I would consider a car loan good debt if it’s part of a business that is generating you income and wealth. For example, you buy a car and rent it out daily or have a ridesharing business.
Primary Home Loan: Everyone has a different opinion on this. Some people view their home as an asset and others view it as a liability. I view it as a liability because your home is not generating you income but rather you are paying to live in the home. You are using your own money for the mortgage, expenses, taxes, etc. I would consider a primary home good debt if you are either renting out some of the rooms for income or plan on selling it for a profit in the near future. Some people don’t see it that way; they view it as an asset, but I do share this view with some prominent real estate investors and wealthy individuals; your primary home is a liability and not an asset.
All Other Loans: I would consider personal loans, credit card debt, etc. bad debt, again, only if it is taking money out of your pocket instead of putting money in your pocket. These types of debt usually make it harder to gain wealth because you are using money to pay off the debt instead of investing in assets. I would stay away from these debts at all costs.
I know what you might be thinking that I am crazy or unrealistic. You may even ask me, “Mr. Nahas, where am I supposed to live and what am I supposed to drive?” This is a valid point. I am merely explaining to you the different viewpoints and giving you information about the difference between good debt and bad debt, if you think there is a difference like me. This is just for informational purposes to help you become more financially literate. A lot of wealthy people use good debt to pay bad debt if that makes sense. They accumulate assets that pay for their liabilities.
For example, let’s assume you have enough money to put a 20% down payment on a home. Now you could either use this money as a down payment for your primary home or an investment home. I would go for the investment home (that is just me) and here is why. It’s all about generating wealth and income, and that’s what an investment home is all about. I could use the income that I receive from my investment home to pay for the mortgage on my primary home. But Mr. Nahas, how will I purchase a primary home if I used the money for an investment home? Good question! A good thing about primary homes is that you can purchase a primary home for as little as 3% down. So you could use the rental income you receive from the investment home to save up for the down payment on a primary home. Once you purchase the primary, you can use the income from the investment home to pay for your primary home’s mortgage. Additionally, the tenant in your investment home will be paying off the loan and building equity in the home for you. This is one way to do it, or you could just put the down payment towards your home; it’s up to you. Being financially literate is all about being able to take control of your finances and achieve your financial goals.
I hope that I provided you enough information on this subject. Again, there are different viewpoints, and everyone has their own opinion about this but regardless of what you believe, it’s important to know both sides of the coin. If you have any questions or need me to clarify anything, post a comment and I will reach out to you as soon as I can. Thank you, friends, for stopping by! Take care and see you soon!
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