DEBT – That 4-letter word that most people dread. If you’re like most people, you hear the ‘D’ word and immediately think it’s bad. This word most often times, scare people but really they shouldn’t if they know how to handle it. You see, debt falls under two categories: GOOD DEBT vs BAD DEBT. Simply put…. Good Debt puts money in your pocket and Bad Debt takes away money from your pocket.
GOOD DEBT
A good debt is a debt that has some type of future value. Whether it earns you more money in the future or it grows in value, it can be a good way to invest money in your future self. Here are a few examples:
- Mortgage – you borrow money to buy a house at a certain price. Over time, the house should appreciate. You earn a profit on the house while you still pay off the mortgage. Interest on a mortgage is typically low and may even be tax-deductible.
- Small Business Loans – Investing in your own business is a great way to grow your profits and increase its value. As you grow your business, you can pay off the loan and possibly end up having a bigger and better business down the line.
- Student loans – If you don’t qualify for enough financial aid to cover the cost of your education, you may need to take out student loans. You’ll typically pay low interest rates on student loans, plus increase your chances of earning a higher income upon graduation. Investing in YOURSELF is often times one of the best investment choices you’ll ever make!
BAD DEBT
Now, not all debt is good, though. Bad debt is money you invest in things that have no value or that don’t increase your net worth over time. Some examples of bad debt include:
- Car loans – Cars depreciate in value the minute you drive them off the lot, but you need a car, right? The best way to avoid the ‘bad’ debt trap is to invest as much cash as possible in the car, borrowing AS LITTLE AS NECESSARY, and paying it off as fast as you can!
On another note, while many consider this to be a necessity in life, it’s actually not! Especially if you live within city limits, a car is a luxury, not a necessity! If you’re buried with debt, stop adding fuel to the fire and take public transportation!
- Credit card loans – probably the worst in this category! Credit card companies often charge one of the highest interest rates in the market and can sit anywhere between 19%-23%! That is simply astounding when you add it all up! Charging a shopping spree or impulse buying on that latest iPad can wound you up in a world of trouble and will likely land you into bad debt!
- Payday loans or Cash advance loans – Probably the least common type of loan out there. A payday loan or a cash advance loan is a loan for a short time. You pay a fee to borrow the money, even if it is for a week or two. A payday loan or cash advance loan can be very expensive. Before you get one of these loans, consider other ways to borrow.
This is the crux of falling into ‘BAD DEBT’. If you can’t pay the balance off in full, you’ve invested money in something that probably won’t hold much value down the road. The best way to avoid bad debt is to live by the rule:
“If you don’t have cash for it, don’t buy it.”
So before you put yourself into debt, consider all the options and REALLY ask yourself “do you really need it?”. If it doesn’t provide VALUE, you might want to wait until you can afford to pay it in cash!
How to get out of debt FAST?
Ironically, what got you into a world of trouble can get you out of trouble too! You get out of Bad Debt using the power of credit! You can have a mountain of debt, but if you have and maintain a good CREDIT SCORE, then that can help you get out of it FAST!
Do you have a bad credit score? HERE ARE SOME TIPS on how to improve your credit score quickly!
The reason why you need a good credit score is because generally, the higher your credit score is, the LOWER the interest rate will be! The lower the interest rate is, the faster you get out of debt!
Here are the 3 simple steps on how to get out of debt fast!
- What you need to do first is to open up a low interest line of credit with your bank and CONSOLIDATE ALL your external debt into this one account!
- Once all debt has been transferred all into one location, you will want to close all other accounts (except for the new line of credit, of course) to prevent further damage.
- Then just like if you were stuck in the middle of a thick jungle bush, you will want to slash away those pesky weeds in front of you (in this case, that big debt number staring right at you) and pay it off as fast as possible!
Easier said than done, but STEP 3 is definitely the most important step in the process of getting out of BAD debt! So the next time you walk by that favourite Starbucks spot, you might want to think twice before buying that fancy latte of yours…. because that $5.75 can and SHOULD be used to pay off that mountain of debt instead! It might seem like a small number, but at the end of the day, every dollar counts!
But with all that said, WHY did you land with all that BAD debt to begin with anyway? You can come up with all the excuses in the world, but at the core of it all, there is only ONE big reason why you’re in the hole you’re in….
We’ll talk about that in my next topic: Change your mindset and STOP “Keeping up with the Joneses”!!!
