Understanding the difference between good and bad debts
For many people debt is a nasty negative four letter word, one that brings a sour taste to their mouth. Many people fear debt, and steer away as far as possible from debt. Yet many financial planners and experts would argue that there are times when not only is debt good, but something you should not avoid, at least in 3 major circumstances. While they all agree that some debt is indeed bad debt, such as racking up max limits on every credit card you own, there are other times that debt can actually help you. Not all debt is equal, indeed there are some good types of debt. Here are three areas where debt might help rather than hinder you, and these debts all have one common factor, loans.
Obtaining a loan for college is investing in your future earning potential. Sure it will cost you, and cost you a lot, but if you carefully choose your major your future earnings will vastly outweigh the debt. With a higer education comes a higher income, and that higher income can last your entire working career, the result is you set yourself up for life. A highschool grad only earns an average of $668 a week, while someone with a bachelors degree earns an average of $1,100 per week, while an advanced degree could earn you as much as $1,386 or higher on average. This data comes directly from the Bureau of Labor Statistics. It is not just college that debt can help you with earning a higher income, for example there are always training courses and technical courses that can be taken to advance your earning potential, and these courses tend to cost much less than college, unless of course you attend a fake Trump University, in which case you have just flushed your money down the toilet.
Start a Business
Taking out a loan for a business can be a life changing positive event in ones life. Nothing is more liberating than starting up your own small business. In fact most wealthy people got wealthy by doing two things, starting up a business and investing their profits wisely. Taking out a loan can also save a struggling small business. Often times small businesses will need an infusion of cash, for example a small loan for product fulfillment, or to cover payroll during a seasonal businesses off season. I have met one client who was able to obtain a loan to save his business, a business he was later able to sell at a profit. Obtaining a loan is often a much better option for business owners than looking for investors, since investors become defacto co-owners of any business they invest in.
Buying a House
There are few investments better than a home, yet most normal people simply cannot pay for a house with a check or with cash unless they are independently wealthy. The average cost of a home in today’s market is around $375,000, which puts a home out of reach for many families when it comes to paying cash for property. Sure you could save for years or decades, but meanwhile you are renting which is flushing your money down the toilet enriching some landlord who will gleefully accept your rent check, knowing full well that you are enriching him or her. It is far better to buy a house when you are young than to hold off until you are middle aged. If you do not believe me, simply add up your months rent and multiply it by 120 months. Lets assume for sake of argument that your rent is ultra low at $800 per month, in ten years that is $96,000 which is a lot of money you have spent enriching someone else, when you could have been building up equity. As you can see in this case the debt for a mortgage is a good investment, since the equity you put into a home is an asset you can tap into at any time, and this asset can be a financial buffer in times of need such as unemployment.