Two Types of Debt
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In our everyday efforts to improve our Personal Finances we often get stuck to the term called debt.
Debts are loans that we have in our life, money that we owe to others whether its to banks or people.
Anything that you owe to anyone is a debt for you.
With debt, you cannot become wealthy in life. If you think you have debt but you even pay the cost to run that debt then you are not on the right path to financial freedom.
So, What Should You Do?
To know further that what you should do, you need to understand about debt first. Most of the people consider debt as a liability.
But there are two types of debt that you need to understand about.
Page Contents
Two Types of Debt
- Bad Debt
- Good Debt
Anything that you owe to anyone, there is a cost attached to run that liability which we call as interest payment.
Bad Debt
So, if the amount to run any liability is paid from your effort earnings or day to day earnings then it’s a BAD Debt for you. You should avoid this type of debt.
For example, You bought a home & took a home loan and you are paying it’s interest & EMI payments from your Salary or Business Income, then it’s a Bad Debt for you.
Good Debt
And if the amount to run any liability is paid from your passive income or someone else pays it for you then it’s a Good Debt.
For example, You bought a property and took a loan on it and constructed it to rent it as a Paying Guest and your Rental Income is more than the Interest Payment on the Loan amount, then it’s a Good Debt for you. or
Another example, You bought a home & took a home loan and you are paying it’s interest & EMI payments from your dividend income or interest income or any source of income for which your day to day efforts are not required, then it’s a Good Debt for you.
Conclusion
With Good Debt, you get to scale in life, BUT you need to be cautious that you should not leverage beyond your limits. If you do so, this type of Good Debt can even do blunders for you instead of doing wonders.
So, stay alert manage your debts efficiently, try to have zero or only good debts. That’s all for today, hope this helps!
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Hi, I’m Managing Director at Gurpreet Saluja Financial Services where I help my investors to invest in mutual funds and achieve their financial goals. I’m also a Value Investor and here I write about Personal Finance & Investing.
