There is supposedly a difference between good debt and bad debt. How can knowing help you and your families finances? Is debt something that is really necessary? Does it really have to be part of everyday life for us? We are going to try an answer these questions in depth.
Debt Basics
First, we will try and analyze what "debt" really means. By definition, it means to be confined to owing something to another person or owing something in general. For most, it's easy to see why something like this is happening. People are impatient, and therefore spend more money than they actually have to give.
We gain money by giving some form of service to someone else, whereas they compensate you in return for your deed. If you only use cash, it's obvious that you must first gain the money, and then use it as you see fit or need. Going by credit, you are able to spend that money before you actually earn it, under the assumption that you are indeed going to earn it.
Statistically speaking, the average American household has encumbered over 8000 dollars in credit card debt. This is an average statistic, which is ironic as 8000 dollars in debt is not something that should be deemed normal by any means. This is something that hasn't really become apparent to many American individuals.
Good Debt vs. Bad Debt
We will try and distinguish between two basic types of debt, those being good debt and bad debt. Good debt is more widely regarded as debt that is secured. This occurs when you owe on something of material possession, such as an investment home or mortgage. By this, you can continually be paying on this in a progression towards full ownership of the item. There needs to be a good rate of return on whatever you owe on in order to actually ensure this profitable leverage.
Many accept that a mortgage should be your main point of leverage, or in other words, your bargaining chip. That may have been a good idea years ago, but today's market it is proving unwise. You end up paying more than three times the initial amount of the loan over the course of the mortgage, which is something that also seems absurd to me. Lastly, you will only have more money available if you don't have one.
On to the next type now, the bad debt. This debt is known as unsecured debt, which is appropriate as you are relying on income that you'll hopefully be making in the future. A few examples of this kind of debt might be a car loan, a credit card, or maybe a debt consolidation or other personal loan. The problem with this debt is that what you are purchasing actually declines in market value, rather than increases like a property might.
This is the kind of debt that's going to hurt you, and bad. Because you're relying on future income, you can't usually pay all of this off immediately. You end up losing the most money paying to interest, which is often very high on things like these.
You need to be smart with debt, and controlling secured debt properly can be one big help in getting you back on track.
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