Good Debt and Bad Debt: What you Heard was Probably a Lie.

Image Courtesy-KATIE SANDERSON

Historically, we’ve been told debt is terrible and that we should avoid it as much as we can. Truth is, we need debt to grow. Debt is categorized into two types: good debt and bad debt. Society will insist good debt to be student loans, mortgages, and business loans. BAD DEBT according to the world of finance is something that doesn’t improve your financial outcome or in other words doesn’t make you money. These can be credit cards, auto loans, and other high risk consumer debt. Credit cards can be found in both categories. As much as we heard about debt for many years, we were misinformed. Here’s the differences.

MORTGAGES

The root word of mortgage is ‘mort’ which means death and in Latin it stands for death pledge or death trap. “Financial experts” will always encourage you to buy a home. To many it’s considered a good investment because the value of the property may increase and it’s also shelter. However, your home value doesn’t always increase and it could take decades to do so. Until the value increases, that home will drain your pockets. Every month you’ll be paying for taxes, HOA fees, homeowners insurance, flood insurance, mortgage payment, electricity, water, gas, and cable bills. Emergency expenses like roof damage, burst pipes, gas leaks, HVAC repair, and pest control should also be put into consideration. Through home ownership, Real Estate is one way you can generate income. House hacking is an option where you rent out all the rooms except one and have your roommates pay the bills. You can also list your home on Airbnb, make your garage a storage for others, make a home studio, turn it into a daycare or host parties. Millennial investor Terrence Bilodeau, has $1.7 million in real estate debt but he also makes $370,000 a year. As Millennials, our options are endless. Creating assets can make our monthly expenses feasible to maintain. Debt is a tool.

All Degrees Aren’t Created Equal

Ever since we were in diapers we heard about this trillion dollar industry known today as college. The purpose of this debt was to allow students to further their education. This type of debt depends solely on the effort of the student and switching majors or delaying classes can be costly. Many thought it was the only step to being successful in life and acquiring student loan debt would be necessary. In some cases, this may be a good investment based on the nation’s demand for that particular field such as health, engineering, and technology. Before students make that investment they should plan and take the time to understand what they really want out of life. Expenses like tuition, housing, textbooks, activity fees you don’t use, transportation, and personal expenses can add up. Today, students can find education online at little to no cost. Depending on how you spend your time in school it can positively or negatively impact the following years.

Quick Scenario #1

Remember the time everyone received a stimulus check and either paid their bills with it, went on a shopping spree, or bought wigs with it. Well I made a similar mistake. I paid the rest of my credit card off and my credit score jumped well over 800. You would think that’s the right thing to do but Instead I should’ve used that $1,200 and buy 2 shares of Chipotle or buy about 3 shares of Tesla. At the time Chipotle was $611 and Tesla was $454. Your stimulus investment would’ve given you $2,540 for Chipotle or $6,915 for Tesla depending on which route you take. Better yet, trading options would’ve resulted in a greater return. Lesson learned. Develop an asset that pays your debt and then reap the rewards.

CREDIT CARDS

This debt only requires a swipe or a click online and can place your financial situation in a good or bad standing. Buying liabilities and unnecessary materials will place credit cards in a bad category due to the higher interest fees. Credit cards can work in your favor if you use the purchases strategically such as investing in your children, start ups, buying business supplies, taking a cash advance to invest in the stock market, and any other long term investments. Using the bank’s money to build your assets or splurge on materials is a choice. Either you claim the long term benefit or drown in interest fees.

Quick Scenario #2

If you had the funds to purchase a house CASH would you buy it? Owing money on your home will enable banks to lend you more capital. It’s called a Home Equity Line of Credit (HELOC). Let’s say you have $100,000 worth of equity (Home value-How much you owe). A HELOC works just like a credit card so you pay what you use. Adults usually obtain a HELOC for home renovations, pay down more debt, emergency purposes, and maybe sending their child to college. Using their home as collateral. A creative and risky person who loves to leverage would use that $100,000 and create an asset to pay the original loan and make more profits afterwards. Starting a business with it or investing. For example, buying 220 shares of Tesla when the stock price was $454. That would’ve given you $506,000 in your account with the stock price being $2300 as of August 28, 2020. Return the original $100,000 plus interest and sit on $400,000 or so on profit.

Don’t Pay your Bills. Buy Assets First

Before you borrow for a car, business start up, home purchase, or a degree, ask yourself this question: Will this debt make me more money than what I put in or best question of all will it make me happy? Good debt is anything you can leverage and bad debt is quite the opposite. If you can’t leverage it, don’t invest in it.

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