The word ‘Debt’ has a very negative connotation in our society. One could be forgiven for thinking that all debt is bad and to be avoided at all costs. That is of course not true. Not all debt is the same. There is the type of debt that can work for you and is able to make you wealthy, and the type of debt that works against you draining all resources until there is nothing left to live on. It is this debt that most experts and financial counselors are advocating against. The two should not be confused.
Investment debt
Investment debts are loans that you take out in order to invest in growth assets. In most cases these assets will not only offer capital appreciation but also possibly depreciation, tax deduction and income. Any form of real estate investment for example, would qualify as an investment and the loans you take out to purchase these investments can make you better of than you are today.
Of course there is never a guarantee when it comes to investment. Even the best intentions may sometimes not yield the results we anticipate and money can be lost. However as a general rule, debts you have for the purposes of purchasing growth assets are good debts and do not necessarily need to be avoided. You do need to be sensible with all loans including ones for investment. It is never a good idea to borrow what you can not afford to repay given your current income. Being sensible and conservative can help overt a financial disaster.
Lifestyle debt
Lifestyle debt is the debt that you carry forward from month to month on your credit cards, store cards, hire purchase agreements, cash loans and the like. This debt also includes personal loans and car loans. Despite popular opinion cars are a depreciating asset and any money borrowed for their purchase is a lifestyle debt (unless used for business and offer the benefit of tax deduction).
When it comes to lifestyle debt, no debt is the best position to be in. This debt can make you poor over time as it takes money away that could otherwise be applied for paying bills today and purchasing growth assets. Lifestyle debt does nothing to improve your financial well-being.
There is absolutely no reason to be afraid of debt as long as the debt you hold is one that is affordable today and has the potential to improve your financial well-being tomorrow.
Borrowing for holidays, shopping and furniture and then paying interest on interest – gets you into a cycle of stealing from tomorrow in order to enjoy today. This may make you feel great in the present but does not offer much of a financial future.