Apr 9, 2021
Daniel Goodman is a Professional Day Trader and specifically
looks for Real Estate Investments, Day trading stocks, options and
futures, and long term investments in the stock market
1. When I think of good debt, the first thing that comes to mind is
a mortgage. That is providing you shelter, a place to live, and
everything wonderful about having a home. Yes it’s not fun making
payments for five years and not seeing your principal drop too much
because of the interest that you’re paying, but if you’re paying
anywhere around 5% interest or less, you’re doing very well!
Overtime that home will become more valuable. And therefore you
have more equity. And if you need to, you can borrow money off your
home, or refinance it and pull money out. This is a beautiful
thing. However, only do this if you can afford to make the
payments! Or else, you will lose your home and be forced to sell
it.
Getting a loan for a business, is also considered good debt.
Because hopefully, or at least your intentions are that this
business will make you money. And paying off the loan will be small
potatoes compared to the money you are bringing in from the
business. Bottom line, you borrowed money from the bank or lender
for the purpose of making “a lot more money“ then you owe them.
Again, this is not something that’s going to happen overnight and
you will be debt-free in a week.
Another type of good debt can be a “no interest“ financing plan.
For example, you go to Best Buy (they have fabulous no interest
deals) and you need to buy a washer, dryer, new oven range, and
vacuum cleaner for your new home. If you get approved with their
line of credit, depending on the dollar amount, you might be able
to get five years of no interest! That’s good debt! All those
appliances you bought are must need items. You need to wash your
clothes and dry them, vacuum your floor to keep it clean, and cook
your food. Of course, please make sure you can afford the monthly
payments before signing.
Let’s talk about some bad debt.
You just got approved for a new credit card, with a $20,000
limit! You have an 800 credit score, and no dings on your
credit, and make enough money, and that’s why you were approved
with a nice starting limit! So you go out and buy yourself a new
Rolex watch and clothing to go with your new job promotion!
Unfortunately, the promotion doesn’t work out the next week. The
company had to lay off a lot of people. Well, now you have bad
debt!! If you can’t return those items, then you have to figure out
a way to pay off the new bill before the 25% interest on your
credit card starts hitting you. Because you don’t need a watch or
fancy clothing. A watch and clothing will not cook your food or
make it taste better. It might make you feel better wearing these
items, but it won’t keep a roof over your head either. These are
nonessential items!
A credit card is only used for two reasons: for emergencies and you
are prepared to pay the high interest rate that comes with it, or
the benefits such as points that add up to perks and things like
that. But when you use the credit card for points and perks, you
have to have cash in the bank to pay it off right away before the
interest hits you.
Try your best to only charge your credit card if you can afford to
pay it back right away.
2. The benefits of having good debt is having equity in your home.
Owning a home with equity allows you to borrow off of it when
needed. If you refinance it, you might even get a better interest
rate on top of it. Let’s say you have $500,000 in equity in your
home. You make more than enough money to take $500,000 out of your
home and still pay the interest and the new principal. If you
refinance it and get an amazing interest rate at 2.75% because you
have exceptional credit and a perfect application across-the-board,
you can invest that $500,000 into something that could pay you,
let’s say 7%. One possibility would be to buy a condo using that
$500,000 with zero debt after the purchase. You have no mortgage on
the condo. You can rent it out and even if you get 6% a year on
your money, you’re still making 3.25% after paying your interest on
the refinance of your home.
Let’s let’s say you basically broke even. Let’s say the condo
only pays you 3% on your money by renting it out, you now have
another property and soon that property will have equity in it. As
you can see, if you play the real estate game with good debt versus
bad debt, it can pay off in a beautiful way. And this is how most
real estate mogul‘s start building their portfolio.
3. Good debt can be bad. Pretty much the only way good debt is bad,
is if you have over leveraged yourself. If you keep borrowing and
borrowing and borrowing, and you don’t have a job that will pay off
these good debts, you’ll be forced to sell everything to pay the
bank back. For example, if you borrow equity from your home to buy
another home, that’s fine as long as that new mortgage is paid.
Usually it’s paid by renting it out and having tenants and you are
now a landlord. Once that home has equity you can borrow off that
home to buy another home. And do the same thing. However, if you
have no savings account and no liquid assets to pay those
mortgages, and if for some reason your tenants leave, you’re in big
trouble. And even worse, if the value of your home drops, you might
not even be able to sell your home and pay back your debt in
full.
So please be careful taking on leverage and multiple
mortgages!!
4. A Person should only have as much good debt as they can afford.
Good debt is a luxury. But needs to be treated with respect and not
fooled around with it.
You can own as many homes, appliances, and anything you need, just
as long as you can pay for it. Otherwise it all becomes bad
debt.