If you have never heard of the term good debt, you may be wondering how can debt be good? We are generally taught to stay away from debt, pay off your credit cards, and pay off your mortgage as fast as possible. Its a good strategy for the average person of course, but for those of you who want to take your financial IQ to the next level, and use OPM ( other peoples money) like the 1% do, than your going to need to get educated. First of all, lets get the basics over with. Good debt is something that puts money in your pocket. Bad debt is something that takes money out of your pocket.Lets say you can borrow $1000 at 5% and use it to make 6%, that is good debt that puts positive income in your pocket. This is normally done with real estate. An investor can purchase a $170,000 dollar house, for a mortgage payment of $700 monthly (at 3%), and the seller is willing to do seller financing for the 10 percent down payment, with lets say a payment for $400 a month. Expenses for tax's and insurance cost $250. In total, all expenses are $1,350. If this house rents at $1,700, it cash flows positive income of $350 a month. That's not bad for using 100% other peoples money. This is what an infinite return comes from. These are just practice numbers though, for a real example, you can check a real life example, in the expensive real estate of Canada, here: Cashflowing property example. This is a cash flowing asset. This same example would be considered a liability if the rent was only $1,300 a month causing your income to be negative $50 a month. That would be an example of bad debt. Same with buying a T.V on your visa. That is bad debt, unless your renting it out, and the rent income is higher than your monthly payment for it.
Lets use another example. Lets say you manage to use your credit cards to buy shares of a company, or you take a mortgage from the equity of your house, or whatever the case is. Does that make it good debt or bad debt? If you borrow the money at 4% and the stock pays a dividend at 5%, then this would be good debt. If the stock shares you own do not pay a dividend, it is a liability. It can only become an asset the second you sell it for more than you bought it for, and the cost of borrowing the money. This is similar to gambling. You do not know 100% if it will go up in value. Until you sell it, you still pay the monthly payment for borrowing the money, and still have the expense for holding it. I do not recommend getting into stocks that way though of course. This is what most people in the lower mainland in british columbia, canada are doing with Real estate. They are buying property for the hopes of capital gains, which is crazy for the average person. The educated business person with a good plan I'm sure can do it well and lower their risk. People buying for capital gains, are gamblers for the most part.
Good debt can also be used to create an asset, such as a business. You will need to be very educated and have a really good strategy and team, to pursue an investor to give you money though. Lets say you have a wonderful business plan of producing this product, which doesn't matter to much what the product is. You have a team that has experience in successful business and they know how to market, increase sales, how to take a company public on the stock exchange, and all that other good stuff you need for a company to succeed. You take your business plan to an investor asking for $250,000 with a return of whatever amount you agree on, you show them your team, they are happy and agree to do financing with you. Awesome, you now have the debt. Now its your turn to make this debt good debt or bad debt. In a few years, your business is doing extremely well, you pay off the debt, and the agreement for borrowing the debt, and now you , and your partners are left with a dividend paying you from the company an agreed upon amount. This is now good debt. This example is very difficult to do, considering most company's fail in there first 5 years. If you are educated though, this is the highest return investment you can build though of course. Another way you can use debt to become a cash flowing asset is by using OPM to invest in oil wells! This is also a high risk investment, which you will need to be highly financially educated to do but it can pay off big as well.
I am not saying their is anything wrong with that beautiful new car that costs you $500 a month roughly. What I am saying is consider buying an asset with debt first so you can have your asset pay your bad debt. A $500 dollar rental property can pay off your car payments.The best thing is when your car is paid for in a few years, your asset is still bringing income in your pocket, and might even have equity in it you can use to purchase your next investment.
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