Good debt vs. bad debt
Is all debt bad? How do I tell good debt from bad?
2 minute read
Good debt buys something that pays you back or grows in value. A rental that cash flows is the clearest example. The tenant pays the loan, and you keep the difference.
Bad debt buys things that lose value and pay you nothing. Fancy purses, shoes, clothes and expensive cars are not smart leverage. They look like wealth but drain it.
A simple test: after you buy it, does it put money in your pocket each month, or take money out?
Good debt can still go bad. It needs to cost less than it earns, and you need a cushion if income stops.
Example
A $40,000 car loan at $750 a month loses value every year. A rental with a $1,500 payment that rents for $2,000 puts about $500 a month in your pocket before repairs, and the tenant pays down the loan.
Why this matters
Wealthy people borrow to buy assets. Stuck people borrow to buy things. The loan looks the same. The result is opposite.
What to do with this
- List each debt you have. Mark it: pays me, or costs me.
- Pay down the “costs me” debts first, starting with the highest interest.
- Before any new loan, ask: will this put money in my pocket?
Want this applied to your own numbers?
Ask CredABLE about this