Good debt = debt that grows your money.
Bad debt = debt that sucks your money away.
Example of good debt:
A highly leveraged mortgage in an area the is appreciating consistently.
The reason why this is a good idea (disregarding the fact that appreciating properties are not guaranteed) is because "leverage" aka loans multiplies your returns.
For example:
If you have 25% down on a $100,000 property, you paid $25,000
Let's say that the property appreciates at a modest 5% per year. (The national average since the 1950's has been 6.3%)
In one year your property would now be worth $105,000.
You made $5,000 in one year.
You paid $25,000 originally.
5,000 divided by 25,000 is .20 which means you just got not a 5% return, you got a 20% return!
Because you were leveraged (took out a loan) you made more on your money than if you had just bought the property outright.
Now this obviously works better if you have a renter in the property and they are paying the mortgage for you so you don't have any costs associated with owning the property.
You would have to buy strategically in an area that has a high possibility of appreciation, and also you'd have to buy smart in the fact that the property would have to be inexpensive enough where you can afford to rent it out and still make money on the property. (positive cash flow)
Example of bad debt:
Let's say you bought an average car on credit, you put down 25% on a $25,000 purchase.
That's $6,250 down on a $25,000 purchase.
Every year that car is going to depreciate (decrease in value.)
And every year you'll be making payments to the bank with no option to rent out the car to cover your payments.
You'll be giving a ton of this up to interest payments, and even without interest payments factored in, lets say that the car depreciates by $3,000 a year.
Year 1: $25,000
Year 2: $22,000
Year 3: $19,000
Say you want to sell it at this point. You'd still have to pay off your original loan, and your car is worth less than you paid for it.
You're essentially in the hole, and instead of making money, you lost money.
And that's not even considering the interest payments you'd be making every month. Most interest payments are not recoverable and you'd be out even more money than just the depreciation of your car.
Basically, the car is sucking money out of your pocket at an accelerated rate due to the loan while the house was putting money in your pocket at an accelerated rate due to the loan.
Anyhow, that was a long post and didn't really even scratch the surface.
But my viewpoint is you should have as many low risk leveraged assets as you can sustain that put money in your pocket.
Have fun!
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