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.