By George Reed on November 15th, 2018
Debts are evil, debts are bad, you better pay them off as fast as you can!
No! Not really!
Debts can be beneficial, if you have the right knowledge about them, and if you know how to turn debts into investments!
Moreover, debts can actually help you to grow your finances. Remember, it is the money you borrow to purchase things that you can afford.
Debts come in many forms. Credit cards, personal loans, mortgages, car loans, bonds, securities, debentures, are all different types of debts that fuel the financial industry.
There are debts where you become the debtor, and then there are debts, where you become the creditor.
Like, if you take out a personal loan or a mortgage then you become the debtor. Again if you buy a bond or a debenture then you become the creditor, who’s lending money to the government or big corporations.
It’s a continuous cycle of lending and borrowing money. We should understand the fact that without debts we can’t have a good investment scene.
If that’s the case then how come we are taught from our childhood days that debts are bad?
Is debts being bad, a myth? Or is it that we just don’t know how to make debts work for us?
Are Bad Debts Our Biggest Reason, for Hating Debts?
Majority of consumers have a very thin knowledge about debts. The general public have debts mostly in the form of credit cards and loans.
And, the two biggest prospective debts that we usually carry are mortgage and student loan. But, many people default on these profitable home loans and student loans, and finally end up in big trouble.
I believe you should first get a good grasp of what is a good debt, and what is a bad debt.
Just because you have dealt with bad consumer debts, doesn’t mean all debts are bad! Good debts with a good planning can really reap good returns in the future!
What Are Good Debts? And, How Can They Be Beneficial?
Any debt that promises to help you build wealth and improve your future finances, can be considered as a good debt.
The breakdown can go like this. Suppose you borrow money in the shape of a personal loan, and then invest the money in a profitable mutual fund, then that personal loan will become a good debt.
- Even a credit card can also act like a good debt. Like you purchase a macbook with your credit card for your business and profession. You work well, and get well paid. This is where the credit card debt can turn out to be a good debt.
- As per the financial terms, good debts must have a good ROI (Return on Investment). Such examples of good debts are counted to be mortgages, student loans, car loans, and any other loan or credit that’s backed by an appreciating asset.
- Usually home loans are always deemed to be a good debt, as the value of a house gradually increases with time.
- As for student loans, it has wider aspect of being a good debt. Suppose you take out a loan to complete your degree in some kind of specialization. Once your education gets over, let’s assume you get well settled professionally. That’s when you will thank your student loan.
- Again if you look at the map other way round, then you can purchase bonds, debentures, and securities with help of loaned amounts. If your investments give a good return, then you have successfully turned your debts into good investment debts.
Therefore, we have to agree to the fact that whenever we put our debts to good and reasonable use, we make them good debts.
How to Avoid Bad Debts?
Always try not to have too many consumer debts. These debts usually have little to no implication of a good investment.
Consumer debts are in general made up of credit cards, payday loans, personal loans and any other loan that don’t have an asset attached to it.
You might definitely argue that student loan is a bad debt then, and a car loan is also the same because value of cars usually depreciates.
Yes, you are quite correct. But, if you take out a student loan with a decent purpose and prospect behind it, then it might not be a bad debt.
Again, a car loan taken out for a classic or vintage car, can actually be beneficial. You need to figure out your own ways and get your own reasons to make debts work for you.
If you buy a Mustang GT with an expensive car loan, then there are high chances that this car will become a vintage collection in future. The same thing might not be applicable to Toyota Corolla or Honda Civic!
In fact, many business magnates do invest big amounts on cars that have the capability to become a collector’s model later on.
Before I end, I would like to summarize a few points that will help you to have good debts around you:
- Don’t misuse credit cards and rocket up big balances on them.
- If you are keen to take out payday loans, then you should know how to use payday loans the best way.
Else you will end up in the ring of loan renewals and heavy interests.
- Mortgage is always a good investment vehicle. But don’t mess around with too many HELOCS and equity credits. Else you will end up in a big loss if you are unable to pay off your loans.
- If you have too many revolving credit accounts, then it’s better you clear your debts fast, because revolving credits and consumer debts are typically considered bad for financial health.
- If you are a car enthusiast, then turning auto loans into investment vehicles can be your big priority.
- Don’t forget to invest money by buying mutual funds, stocks, securities, bonds and so on. Only having money locked up in savings accounts will not give you a big return.
That’s all I had to say as of now. Hope you have a rough idea, about which debts can do you good, and which can cause you harm.