In the current era debt has become a fact of life for most of people and it is the common misconception that debt is bad when it comes to building your wealth. Generally speaking debt is an amount of money borrowed by one party and given by another. This definition does not take into account the good and bad aspects of debt in it. Any debt taken by any individual can be divided into two categories that are good debt and bad debt. Good debt will somehow help you in generating income and to help your wealth to grow on the other hand bad debt is nothing but a stress, it can prevents your income or wealth to grow. So we need to have a closer look upon how to use good debt and avoid bad debt.
An old proverb, "It takes money to make money" is the best example for good debt. Good debts will always be helpful in generating income and for increasing wealth. Following are its examples.
It is rightly said that education has a stronger bond/link with success. More capable a person is in terms of educational background greater the chance of his earnings would be and better job opportunities would also be there for him/her. An investment in education (college or university level degree) is always a type of good debt because it can pay you back with in small proportion of time due to better means of earning available to a person after getting the education.
2. Small Businesses
Small businesses are established with the aim of making money out of it. Investing in small businesses and by managing them in a proper way can be beneficial for anyone and one can become an owner of his own enterprise with little efforts. The positive aspect is that you need not to involve any third party as a shareholder and you yourself are the owner of everything so it’s quite convenient if a person is dedicated enough to do it and no doubt it can pay you back with in no time.
Short term investing are also included in good debts as they provide new ways to individuals for generating money while long term investments are suitable for those who are interested in generating big profits. There is a great variation of investment opportunities readily available to all individuals and a person needs to plan the best choice for himself according to the level of tolerance he has. So, investments are a good idea if you are in search of good debt.
Bad debts generally speaking can be a hindrance in your way to make income or to grow your wealth.Some of the notable examples include the following.
Cars are expensive especially when they are new. Don’t just try to satisfy your ego by buying a car that is expensive and good looking but you need to take into account that weather you are able to afford it or not because getting yourself involved in paying interest for cars in just a waste of money if you think practically. So, you should go for a least expensive reliable car that can satisfy you needs and would not make an individual stuck into the debt cycle
2. Clothes, Consumables and Other Goods and Services
Another example of bad debts can be purchasing of cloths etc. which would just be a matter of status nothing more than that. So, you just need to understand the worth of money you might spend on clothing, or on any consumable items which include groceries, fast food, vacations etc. and you should always choose wisely.
3. Credit Cards
Credit cards can be said as the worst form of bad debts. The interest rates applied to credit cards are very higher as compared to other sources and to keep a balance on a credit card can rarely be a good idea.
The argument is that no debt is good debt. Unfortunately, very few people can actually afford to pay cash for their purchases. So to keep a moderation in everything is the right thing to do. Remember, good debts even have a downside too so you need to make the right choices.