Good Debt vs Bad Debt

Good Debt vs Bad Debt

A majority of the people today are in debt. We like to spend and spend and go out and have fun, thus increasing our debts. Most of us don't even carry cash anymore, meaning all of our daily and necessary purchases are made through credit and debit cards. These all add to each of our personal debt accounts. And the more we are in debt, the more in the hole we become.

So where is that light? What makes the poor different from the rich in terms of debt?

Both rich people and poor people have debt. But the difference is how we use our debt. Did you know there is a difference between good debt and bad debt?

Bad Debt - bad debt is what I described earlier as everything we purchase every day. In addition to that, those in bad debt generally get themselves into bad debt by purchasing fancy cars, state-of-the-art HD TVs, video gaming systems, going out to fancy dinners and clubs. These all add to our montly expenses and do nothing more for us than provide us a bill on our credit card at the end of every month.

Good Debt - good debt however, is getting yourself into a debt where you have the potential to generate money from it. For example, entreprenuers who start up a business get themselves into hundreds of thousands of dollars of debt at the beginning. This is an example of good debt, because hopefully the business will eventually become a gold mine that will generate large sums of monthly income that will eventually pull themselves out of debt into the positives and beyond.

Believe it or not, debt is a good thing for our economy as well. Debt is what drives and stimulates the economy, forcing the creation of more jobs, more income, more circulation of currency.

The fastest way to becoming rich is also related to getting yourselves into good debt. To use your credit and your money and purchase "items" which will bring in more money to you. It is like the old saying: "If I had three wishes, I would wish for three more wishes."

In this case, this can be applied to real life. If you could purchase a machine that generates $100 every month, wouldn't you put all of your money into purchasing more of these machines? And in fact, wouldn't you take out a large personal loan to purchase as many as you can so you could double, triple, and quadruple your monthly cashflow?

Now this is a very simple example, however in real life, we can purchase items that bring in money for us every month. This includes stocks, bonds, funds, royalties, rental property, dividends, just to name a few. And the few rich and wealthy invest all of their assets into purchasing more assets so that they never have to worry about being too deep in the hole, their assets will pull them out.

This also touches on the basis of Infinite Return. What is Infinite Return?

To calculate this, let’s look at the formula for calculating regular return:

If you put in $100 into a savings account and at the end of the month, your account increases to $101, you have received a return of $1, or 1%, which can be calculated by

or in this case

Now let’s look at an example where you receive Infinite Return.

Let’s say that your friend asks you to borrow $1000 to repair some car damages. He promises to repay you back the $1000 with 10% interest.

Since you don’t have $1000 to spare, you decide to ask your parents for $1000 with a promise to repay then back with 5% interest.

So you acquire the money from your parents and you lend it to your friend. One week later he sends you a check for $1100 ($1000 + 10%). You take that check and repay your parents the $1000 you owe them plus the 5% you promised them which is $50. In this scenario, you have pocketed $50 without spending a dime of your own money. This is another example of good debt and because you didn’t spend any of your money to begin with, here’s the formula now:

As you can see from this formula, your denominator is zero because you invested zero dollars initially. You end up with $50 as your numerator. Since we cannot divide by zero, we have to use calculus to determine our return %.

Using calculus, we need to look for the value as the denominator approaches zero, basically what happens to the formula as the denominator gets smaller and smaller and smaller?

As you can see from above, as the value of the denominator gets smaller and smaller, the entire value of the fraction gets bigger and bigger. Through this, we can see that as the denominator approaches zero, the value of the fraction will go up to infinity, thus if you invest zero dollars and make ANY money at all whatsoever, whether it be $0.01 or $1000, you will have obtained Infinite Return.

So to conclude this, there is good debt and bad debt, depending on how you use your credit and how you use your loans. For those of the rich and wealthy, they know where to put their money so that they can generate large amounts of return whether it be infinite or not. In the end, it all boils down to what you do with your money and how educated you are in using it.

Financial Freedom Blog: Good Debt vs Bad Debt