Recently, I had a lengthy conservation with a good friend of mine who had a ton of basic personal finance questions contained within. I thought it might be interesting to start an irregular â€œYour Money 101â€³ series to answer and explain some of his questions.
The majority of people out there make broad statements like debt is bad period. Over the last couple of years, Iâ€™ve come to learn that not all debt is bad and thatâ€™s the truth. There are many cases where debt can actually be a good thing. Yes you heard me. 🙂
Here are some examples of situation where debt is actually good:
Debt with very low interest rate or no interest. Any time you can get debt with an interest rate below 4%, itâ€™s a good deal. If nothing else, you can literally take that money, put it in a high-interest savings account, and turn a profit.
Debt that allows you to acquire an asset that wonâ€™t immediately start depreciating. This means that when you go into debt, youâ€™re acquiring something that will hold its value. This usually means buying a home; even real estate at times doesnâ€™t fall in this category, as it can be quite unstable.
The reason people claim that debt is bad is because in the vast majority of situations, it is bad. Why? For starters, you are a huge risk. Think about it for a moment: how often does â€œsomethingâ€ come up and you â€œhaveâ€ to spend more money? Ever had an unexpected life event occur and drain all your funds? Ever wished you could change jobs – or even taken the leap and done it? These are all examples of risk that you introduce into life little mixes.
In a nutshell, the only debt thatâ€™s worthwhile is debt to own a home and debt which you can directly use to earn more. Otherwise, it simply isnâ€™t worth the risk.
Generally good advice except for necessities (home mortgage, to finance a business). If you finance a business, incorporate so that the borrower is the business not you personally (protects your assets from seizure if the business fails). Best time to borrow is when interest rates are low and inflation is high because you’ll pay the loan off with cheaper money. All of this is complex and not easy for ordinary consumers to do, or to manage if they do. This is what banks, brokerage houses and etc. do.
I was always told that debt that pays you is good and debt that takes from you is bad. So debt to buying a second or third house that you rent out is good debt but the debt to buy a house to live in is not…
Not that it is “bad” in the way we see bad… or you shouldn’t do it… with the good and bad that is added to this debt you have to take away the blame aspect we normally associate with good or bad. Its not about saying you must do the good debt and you musn’t do the bad debt. It’s more a way to help people recognise what will fill their bank balance and what will empty it!
P.S. Please donate to the Dominican place of safety http://www.justgiving.com/dominicaplaceofsafety