Friday, October 19, 2007

Debt – Good, Bad and Ugly

Debt - Good, Bad & UglyNot all debt is created equal. Some is good, some bad and some just ugly. In my view debt falls in the following categories -

Good Debt: According to Robert Kiyosakithis is the kind of debt that pays for itself. An example would be a house mortgage being paid off by the rent you get from the property. In this case the debt is working for you – building equity, property appreciation and possibly some positive cash flow every month.

Bad Debt: Debt taken to better your income prospects or give you a better long-term lifestyle. This debt is bad since you are paying for it but is required for investing in your future prospects. Examples include debt to fund education, debt (mortgage) to buy your home, business investment debt, health care costs etc.

Ugly Debt: This is the worst kind of debt. Credit card, equity loans and private loans taken to live a lifestyle you cannot afford. Before you start paying off this debt – consider the reasons why you took the debt. Review your attitude towards money and spending, your financial objectives and then get into debt reduction strategies.

If you have a clear idea about the kind of debt you are dealing with – the strategies to manage your debt will be more specific and effective.

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2 comments:

Dawn ... said...

I totally agree with the definition of good debt. Disagree with the definition of bad debt. I wouldn't categorize funding a higher education as bad debt. Especially if the student loans are only used for tuition and books. People get into trouble when the start maxing out their student loans to live on them. Then I agree that it is crossing over into a slightly more bad debt definition. Education is never a bad investment.

Debt Relief said...

@Dawn given the definitions, I would categorize student loan as a bad debt as well because it doesn't pay for itself, sure education is never a bad investment but I don't think categorizing it as a good debt will make this article cohesive because it's so different from the example of the good debt given above.