GOOD DEBT – BAD DEBT
It’s been said that there is “good debt” and “bad debt” and this is true. There is debt that helps you to make money. For example, if you have a good product to sell on the market place but you need some investors to help manufacture it, then you can say that the investors put you into good debt. Your goal is to make money by using money.
In the past, Real Estate has been another source of good debt where you put down 20% of the purchase price and the bank puts down 80%. You make the profit as the value of the real estate increases.
Those are examples of good debt – money borrowed that helps you make more money.
But, what about credit card debt? Is this good debt or bad?
Well, if you use credit cards to buy clothes and other such treasures that don’t give you a return (of more money) for your investment, then that would be bad debt.
So, you borrow money to make more money – that’s good debt.
Spend money for stuff that doesn’t give you an increase in money – bad debt.
DO YOU HAVE A BALANCED BUDGET?
But , you say, you are living within your ‘budget’ so what’s the big deal! You’re able to pay your bills.
Ok. You are living within your budget, but that is based on your income being at the level that it is at. What happens if you have a medical situation, or your wage is cut, or you lose your job? Where is that balanced budget?
See, creditors want you to go into debt based on your budget. But, you have to ask yourself this question, if you had to, could you pay off all of your debt with money that you have saved? If you can, then you truly are living within your budget.
If you can’t pay off your debt all at once if you had to, then you are definitely not living within your budget and you need to get yourself out of debt.
Living within your budget means you have the means to handle all of your debt in an instant if you had to. It doesn’t just mean you now make enough money to meet your obligations because should your income change and go lower, you would have a problem and immediately your budget would be in bad shape.
You need to do 2 things: One, focus on reducing your debt and Two, create and execute a plan to make more money. Then, you will get yourself completely under control of your finances and you will truly live within your budget.