Is There Such a Thing as Good Debt?

The word 'debt' is enough to make anyone wince and shy away as if were some evil power. You will hear some people proudly proclaim that they have no debt and that they never have.

Well firstly they may not be correct about that (mortgage = debt) and secondly, not everyone thinks like that. Many people realise that there is good debt and bad debt. What is the difference you ask? Well read on.

Bad debt is where you perhaps take out a store or credit card and build up the balance on one-time consumable purchases. Consumable purchases are things like restaurant or bar bills, holidays and event tickets - anything that once it is used, it cannot be used again.

However, unlike the fleeting pleasure of the consumption the debt is with you until you pay off the balance. Due to the way that compound interest is calculated, the longer you take to clear that debt, the more you end up paying. This is great for the company that lent you the money, they make huge profits and are quite happy to encourage you to do the same over and over.

Good debt is where you borrow money in the same way as the bad debt, but this time, you spend it in a way that it works for you - it brings in returns for you, preferably for work you do once and the money that it earns is more than the cost of paying it back. The lender still makes their profit, but this time so do you! Again, the lenders are more than happy with this situation and they will encourage you to continue, so the possibilities are almost endless.

Every single fortune on those 'rich lists' you see is based on this principle of good debt. Those people have taken borrowed money and turned it into capital events. Capital events are the best way to build your lifetime wealth. Capital events are things like selling a house or a business, for a multiple of what you paid for it. For example, business valuations for sale are usually calculated on some multiple of annual profits (and sometimes revenue depending on the market the business operates in).

It certainly is possible to have good and bad debt - and the bad debt should be paid off as soon as possible. If you receive unexpected extra money, use it to pay off any debt you have accumulated, starting with the bad debt.

Sometimes in life there are occasions when you have no choice but to burden yourself with bad debt, but it is vitally important to manage the situation and to clear the debt as soon as possible.

If you feel that your personal debt situation is out of control, then you should look into possibilities such as debt consolidation. Whatever you do, please do not ignore the situation in the hope that it will go away - it won't, on the contrary it will be compounding daily at the prevailing rates of interest. There is plenty of help available, some of it for free, if in doubt ask someone sooner rather than later. Your future self will thank you for it, out of control debt can ruin lives don't let yours be one of them.