Debt Good and Bad - Explaining How Some Debt can be Good
How can debt be good? We’re told to avoid it at all costs. That debt is bad. And believe me, I know that too much bad debt can restrict your choices and options. But on to good debt, what does that mean? It is often related to borrowing for investing.
Debt is defined as an obligation or a position of owing. You owe something to someone. It is the why that makes it good or bad. Let me show you.
If you borrow money, i.e. put it on your credit card, to buy a meal or go to a play, that money is gone. If you pay the debt off before any interest is due, fine. But if you pay interest on something that has no lasting value, that is bad debt.
Now, if you borrow money for investing or to create something which in itself creates more value or money, it is a good debt. For example, if borrow money to loan out for 10% and because of your credit history can borrow it for 5%, it may be a good decision to create this debt for yourself. Of course, no real situation is this simple, but I think you get the idea.
Good debt is especially important in business and areas like real estate investing. Whenever you finance an endeavor like a business, you need to generate positive cash flow as quickly as possible. Business and investing always have inherent risks, and entrepreneurs are always calculating and taking risks. Nothing is a sure thing. But risk and debt are a common part of business.
Good debt means that you are most likely to make more money because of the reason you borrowed the money than the cost of borrowing the money.
Stephanie Mundle is the managing editor of http://www.MoneyMasteryForum.com an informational forum site for the average investor. Take a look. Information on forex, debt, money management, investing and business.
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