Good Debt Vs. Bad Debt

[Jasmine]

Rich people have debt, poor people also have debt. Do you know the difference between rich people’s debt and poor people’s debt? Well, rich people have good debt and poor people have bad debt.

So, what exactly is good debt and bad debt?

You borrow money and use the money to make an investment, build a business, and buy assets. Your investment will give you return, your assets value will increase over time, and your business will generate revenue. You borrowed money to generate income. This is good debt.

You borrowed money, used the money to buy cars, a house to live in, bought luxury goods, buy liabilities. You need to spend money to maintain your car and house, your expenditure on luxury goods is nothing but wastage. You bought liabilities with your debt and you end up into bigger debt. This is bad debt.

If you want to borrow money, borrow only when you want to put it on something that will generate cash flow.

 

[Suba]

Basically, whatever type of debt you have, it will increase your current assets. Imo, debt to buy a car is not bad, especially depending on your goals. If you go into debt to buy a car as a taxi business or as a means of transporting goods in your shop, that's very good, of course you have calculated carefully and you know how to manage debt, while buying a house to live in is very good by way of a mortgage, than you renting a house to live in whose rent increases every year. It is also possible that the government in your country also provides home ownership loans with light installments. Bad debt in accounting terms is defined as uncollectible debt, and recording the write-off of bad debts is carried out in accordance with accounting principles.

 

[Mika]

If you go by the author of rich dad, poor dad, you can use debt to build your wealth and when you are using debt to build cash flow, your debt is basically good debt. Robert Kiyoski also says that if you get a debt and use it to buy liabilities, that is bad debt. He gives a simple example to illustrate his point. If you buy a house for yourself, it is bad debt because you will not only have to pay mortgage but also spend money on things like insurance, taxes, maintenance etc. However, if you buy a house and then rent it out and collect rent, it is good debt because you managed to generate cash flow through your debt. In this whole process you even save money on taxes as you do not have to pay taxes on debt. If you want to get a loan, ionlu borrow for creating cash flow.