Good Debt Vs Bad Debt

Most of us have been taught that debt is bad. It usually starts when we are growing up, parents, uncles, aunts will caution us about the evils of borrowing, and many cultures will frown upon debt, so we’re brought up on the notion that it is smart to pay off your debt quickly and to stay out of debt.

That’s partly right.

As with everything, there is good debt and bad debt. It’s wise to pay off or avoid bad debt or by not getting into it in the first place. Too much consumer debt keeps you poor, but the proper use of debt will propel your wealth forwards.

Credit cards are the main source of pain for people who don’t understand money mainly because they use it to buy depreciating items like TVs, cars, holidays and pay for living expenses.
However a mortgage on an investment property is tax deductible and will bring in rental income. As the amount of the loan decreases over the years, the property rises and you have equity in asset that is growing very fast.

The people who fear debt usually do not understand that debt is a necessary part of life. Whether that is good or bad it is essential in a modern economy, and civilised countries would not prosper, governments are the biggest borrowers of money in the world. Economies are reliant debt and it’s usually tracked as measured amount of inflation. Inflation is form of growth and is a metric used in assessing a county’s financial health.

How the poor view money

The “poor and middle class” usually have a very high (relative to income and percentage of overall wealth) amount of debt on their family home, and see it as an “investment”.
You could ask ten people “What is an investment” and you would probably get 10 different answers.
But in the wealth creation world, there is only one! The general rule of thumb is:
If it makes you money it’s an asset or an investment.

If it costs you money then it’s a liability.

Here’s a simple check you can do.

Draw up a basic balance sheet and in the left column put “Makes Money” in the right column write “Costs Money” That’s a basic Wealth Creation balance sheet.

Things like your house, cars, motorbikes, boats, jet skis TV’s caravans, furniture, pets, (kids lol). They would all be in the right column.

In the left would be what? If you own a rental property, that would go in there, some dividend paying shares and whatever else pays you an “income” (not your job).

You could safely say that 90% of people would have a blank left hand column.
This is what divides the rich form the poor.

The rich borrow money to buy businesses and properties that will give them yield and growth. They usually invest in assets that give them a positive cash flow quickly, normally financing these projects using (OPM) from banks, investors, private financiers or venture capitalists etc.

Liberty Strategies can show you how to use the equity in your family home to finance your rental property portfolio and get you started on creating real wealth.

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