Business Related Topics...
Computer Related Topics...
Entertainment, Recreation & Sports Related Topics...
Health & Fitness Related Topics...
Home & Family Related Topics...
Shopping Related Topics...
Would you like to submit articles to our site? Have a question or a problem?
You are here: DIME Home > Debt Relief & Management > The Truth about Debt
Good debt, bad debt - is there a difference?
By Christopher Music
Author: Christopher Musicc
Date: Jan 30, 2010 - 6:21:06 AM
Do we really need debt?
Is debt actually something that
is part and parcel of our economic existence?
Let’s take a look at what debt really is. It’s defined as one owing something to another or the condition of owing. Why do we get into a condition that we owe someone else money? It is terrifyingly simple.
We spent more than we earned.
Money is earned by delivering a valuable product or service in which someone has given you something valuable in return. When you operate on cash, you earn the money first then spend it on the things you need and want. When you operate on credit, you spend the money on stuff first (plus the interest) and then try to figure out how to earn it.
It seems backwards to me but the average household is in over $8000 in credit card debt. This is what is considered “normal”, yet it is a catastrophe. This logic has seemed to escape the average American household (and the government—that pillar of frugality and thrift).
Good Debt vs. Bad Debt
Let’s look at the two types of debt—the good kind and the bad kind.
The good kind of debt is called leverage or “secured” debt. This is when debt is secured against an asset such as a house, investment property or business. It allows someone to put a small down payment of their own money to control an asset of greater value.
The key here is that one must earn a greater return on the asset than it costs in interest so that profitable leverage actually occurs.
Many people propose that leverage should be used against one’s personal residence. I personally do not. A house is not an income producing asset and actually costs a lot to maintain. It’s a place to live. Paying six figures of interest over a lifetime to live in one doesn’t really make much sense to me—never mind what the government and the accounting profession says. Besides, not having a mortgage frees up your cash flow, and your options.
The other kind of debt is the bad stuff. This is consumer debt such as car loans, personal loans, credit cards, etc. This is the “unsecured” debt that must be repaid from your future income-producing ability. Most of this debt is from purchasing items that depreciate in value plus the added cost of the interest on those expenditures. Now it doesn’t take a PhD in mathematics to realize that it is impossible to get ahead financially by continuing to pay more for things than what they’re worth.
This will kill you.
Say that you have $10,000 on a credit card and you make $10,000 a month in gross income. How much do you have to earn to pay off that balance? Well, it’s a lot more than $10,000 since you have to pay interest, taxes and other expenses. So, let’s be charitable and say it will take 2 months, presuming you don’t spend any money on anything else.
That means that you have already consumed the value of the product or services you have yet to produce. It means that you wanted or needed whatever you charged on your credit cards so badly that you were willing to voluntarily and knowingly place yourself in a position of servitude to the institution that fronted you the money for the next 2 months of your life. There’s a word for that—slavery.
The intelligent use of the good
kind of debt can assist you in building your wealth.
The misuse of the bad kind of
debt will destroy your financial future more than any other means.
A good financial plan should provide you with the most efficient ways to get yourself debt-free and in control of your financial life.
Top 5 Ways to Stop Being a ShopaholicJun 11, 2011 - 8:05:54 AM Compulsive buying disorder may not seem like a common disease, but more people have it than you think. Common symptoms of this disorder include anxiety, mood problems, obsessive-compulsive hoarding, among other things. People who have it are more commonly known as shopaholics.... [Read the full story] |
A Quick House Sale Can Be The Answer If Facing Serious Financial IssuesMar 20, 2011 - 3:24:42 AM Let's face it; the recession still haunts many individuals across the UK who are still suffering the severe effects, having either lost money on their property or through losing their income as job cuts and redundancies became strife as business closed down and still continue to close down. For many the unfortunate situation has already presented itself and homeowners have lost their homes because of being unable to afford their payments.... [Read the full story] |
Abusive Debt Collection PracticesJan 19, 2011 - 4:57:55 AM Not too long ago I was having a very typical morning; I was reviewing my morning emails from clients and opposing counsel, sorting through the mail and having a meeting with staff and associates regarding our daily work assignments. However, later that morning I stumbled across a blog published by a well-known and heavily circulated debt collection organization, InsideARM. The blog was shockingly titled, "Guns Don’t Kill People, Debt Collectors Kill People?" Intrigued (and always interested in reading up on the industry to find out the new tricks and tips they use to try and deceive consumers) I read on.... [Read the full story] |
How to get out of credit card debtDec 29, 2010 - 6:05:59 AM Credit card debt is a major problem in the U.S these days. Statistics reveal that personal bankruptcy rates have increased tremendously and every family in the US carries almost $8000 credit card debt on an average. Credit card debt can get on your nerves and can very well turn you bankrupt. So you need to know how to tackle the situation before it is too late. Here are a few tips which would help you to get out of credit card debt before the situation gets out of control:... [Read the full story] |
Search for articles: |
Latest Articles in All Categories |
Putting Up a Small Commercial Printing Business |
So You Might Be Unemployed And Desire To Become A San Francisco Real Estate Investor Now |
Meditation and Mindfulness: Dealing With Emotion |
CPA Websites: Five Essential Ideas for Composing Convincing Articles |
Set Goals In Order to Come Up With Your Action Plan |
Is the Air in Your Home Safe to Breathe? |
Coarse Fishing Tackle Review: The JW Young 13ft Trotter Rod |
Section 1031 Exchanges For San Diego Real Estate Investors |
Phoenix Real Estate Investing For Highest Possible Earnings |
Legendary are the Volk Racing TE37 Wheels |
Developing the Next Generation Wall Station (ChaseDesk™) for Healthcare - A Case Study |
What are step down transformers? |
Introducing Sharehype, the Revolutionary Tool for Online Marketers |
Rewards To Shopping For Austin Real Estate On The Web |
Hydroponics for Beginners |
Would you like submit your articles and have them approved on a priority status? Find out more about how you can become a Priority author for pennies a day! Click here.
Dime-co.com Home |
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclaimer: Dime-Co.Com is an online information article and video article network. All articles, video articles, comments, and other features herein are for informational purposes only and are provided "as is" without warranties, representations or guarantees of any kind. The views and opinions expressed in an article, comments, links or blogs are the author's own, and not necessarily those of dime-co.com's owners. For full disclaimer, please read our TOS.