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Did You Know About Good Debt?

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@youngkedar98
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Source Debt is money that one person or entity owes or is required to pay to another, generally as a result of a loan or other financial transaction. The outlook of debt according to the average person is quite bad. It is something you avoid as much as you can. A burden that shackles you and holds you back until you repay it in the future. While that is an accurate outlook, it is not the only one.

I first came across the concept of good debt and bad debt from Robert Kiyosaki, author of the classic Rich Dad Poor Dad book. In this post, we will be looking at both outlooks on debt and some examples.

Can he afford the car? I doubt but it's making his life more comfortable, now he doesn't have to use public transport. Every month, a percentage of his earnings is taken to repay the debt and sometimes he also pays for car maintenance. Over time, the car keeps depreciating in value and he keeps repaying the debt. While he's 1/3 away from repaying the full debt, the car becomes near unusable and now have to spend more in maintenence.

That's bad debt in a nutshell, taking out loan to use for something that has no potential of appreciating in value over time or the ability to generate income for you. Other examples of bad debt is consumer tech like TVs, game consoles etc. That's why this Buy Now Pay Later (BNPL) model is catching speed, it encourages people to buy not so useful things they can't afford. Who wouldn't take it?

After some months, She sold both quarters for $400,000 each. Now she has almost paid back the mortgage(Interest remains) and she still owns half of the land she bought! She can choose to do the same process with the remaining land or she can develop it for residential purposes. The property has the potential to increase in value over time and it can bring income for her. That's good debt.

This seems complex but it's just mathematics, a numbers game. But in this case, people won't border taking a loan since they can't afford it, they'll just pass on the opportunity. Why? Because it's complicated and people don't like complicated stuffs. We're naturally lazy so we just fall back and look for the easy way.

But why are people comfortable with bad debt and uncomfortable with good debt?

Posted Using LeoFinance Beta