Mastering the Art of Borrowing
Kerry-Anne Simpson
Local Mortgage and Finance Broker - Caloundra, Sunshine Coast QLD
Good Debt vs. Bad Debt:
assets liabilities investments doodads and the impact of:
*Credit on borrowing decisions.
Defining Good Debt vs. Bad Debt
Debt can be a powerful financial tool when used wisely. But the key to making debt work for you is recognizing?good and bad debt.
Good Debt refers to borrowing money for purchases that will likely increase in value or generate income. It’s considered an investment in your future.
For instance, borrowing to invest in a business or education can result in future financial gains, making the debt worthwhile.
Bad Debt, on the other hand, refers to borrowing money for things that lose value quickly or don’t generate income.
This type of debt offers little or no future return and often serves as a financial burden.
Examples include high-interest credit card debt for non-essential purchases.
The Role of Assets and Liabilities in Debt
In the financial world, it’s crucial to grasp the difference between assets and liabilities when evaluating debt.
When you take on debt, understanding whether it contributes to an asset or liability is key.
Borrowing to buy assets that appreciate or generate income can turn your debt into good debt.
Conversely, taking out a loan for liabilities that drain your wealth often results in bad debt.
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Example 1: Mortgage as Good Debt
A home mortgage is often considered good debt because real estate typically appreciates over time. If you buy a house in a growing market, its value will likely increase, turning your home into an asset.
Understanding Doodads and Their Impact on Debt
Doodads are a term popularized by author Robert Kiyosaki in his book Rich Dad Poor Dad, referring to unnecessary or luxury items that don’t hold or increase in value.
Doodads are the things we often spend money on that seem enjoyable at the time but offer little financial return. They’re the perfect example of what leads to bad debt.
Example: The Allure of New Technology
Imagine you’re eyeing the latest phone upgrade. Your current phone works just fine, but you’re tempted to finance the new model at $1,000. You charge the phone to your credit card and pay it off slowly at 18% interest.
After a year, the phone has depreciated in value, and you’ve paid significantly more than the original cost due to interest.
This phone is a doodad, and financing it created bad debt. While it might satisfy a short-term desire, it adds to your liabilities without providing any future financial benefit.