If you are looking for any measure of financial success in your life, understanding that not all debt is the same is probably one of the most significant concepts that you will need to come to grips with.
The distinguishing factor about debt is not whether the loan is small or large but rather the purpose for the loan.
Lifestyle Debts
Lifestyle debts are debts that you incur in the pursuit of a better lifestyle. These can include furniture loans, credit card purchases of clothing, jewelery, electronics.
They can also include holiday loans, wedding loans, elective plastic surgery loans and money borrowed for any purpose that will not assist you to generate income or wealth but rather to help you experience more enjoyment from life today.
Some of you may say that there is nothing wrong in wanting to enjoy your life. In fact that may well be the purpose of existence for many. The issue is not whether you should spend money on things that you enjoy, rather whether you should take our loans and pay interest on such items.
The difference between the wealthy and those that have little or no money, is what they borrow on and what they do not. The wealthy will not borrow for lifestyle – they will spend what they can afford in this category. It just happens to be that they can afford more than most of us. However they will then borrow millions to invest into growth assets.
Asset / Investment Debts
These are the investment property loans, business loans, margin loans and even the loans to purchase your place of residence. Any appreciating asset that you purchase over time should generate greater accumulated value that its purchase cost and therefore borrowing to buy such an asset often makes more financial sense that borrowing for a holiday.
After all consider this, why would the bank be prepared to lend you money for investment purposes sooner than they would for a wedding. One loan makes perfect financial sense the other is an emotional expense that can drain your financial resources.
Debt Problems
While not every investment or business loan you take will prove to be worth the debt – some will. At the same time money you borrow to buy a boat, take a holiday or buy an engagement ring will hang around your neck like a dead weight making these debts very difficult to pay off and could set you back financially a decade or more before you are free from these lifestyle debt obligations.
Many of the people that approach us with credit card debts and personal loan debts, payday lender debts and the like, took on easily available debts that helped them enjoy their life for a few years but then this fun caught up with them and they find themselves insolvent, unable to meet even the minimum debt repayments set by the credit providers.
Do enjoy holidays, celebrate weddings and buy boats – but do so from savings not loans and your life will gain the kind of and financial stability that you have only dreamt of.