Is Debt Good or Bad?
Is Debt Good For You?
In my spare time, I love to listen to financial podcasts and read books about finances and I recently found something that troubled me. Is Debt a good thing or a bad thing? Initially, I think of debt as a bad thing and that it consumes tons of people. Things like credit cards and student loans that plague people for years and years. So, of course, it's a bad thing, right? It might not be as obvious as you think.
Robert Kiyosaki, the author of "Rich Dad, Poor Dad", actually says debt is good. How can that be? I struggled to understand why Kiyosaki would say that debt is good. I was raised in a home where we didn't have any debt unless it was for a car or the home. Even then we tried to minimize the car debt. So why is someone who is very wealthy telling me that debt is good?
What Are the Benefits?
After doing quite a bit of research I have found what I can understand as good debt. Most if not all of the debt that Robert has is in real estate. You sometimes hear about the tax benefits of having mortgages and without going into details, there are some advantages, but I think it's still better to own the home rather than have the tax benefits. The only circumstance I can see that it would be good is if the property you are buying makes you more money than you have to pay.
For example, If I got a loan for 100,000 dollars for a home and I had to pay 1,000 dollars a month on this home it would be bad. That is unless I'm renting the home out for 2,000 dollars a month and I'm making a total of 1,000 dollar profit. In short, Debt is only good if it is making you more money than you have to pay.
What Are the Negatives?
Debt in almost any other form is bad. Cars will go down in value and you probably won't be able to make more money than the payments with them. You can make an argument about driving to work, but overall it's bad. Credit cards are bad and have awful interest rates. Some are okay if they have rewards and you never buy something you couldn't pay for in cash. That way you never have to pay interest and can just reap the rewards.
Even with something like the "good" debt we talked about before, it comes with a certain level of risk. If you rent out a house, you never know if someone is going to stop paying rent or destroy your house. Maybe you have trouble renting out that house and only have people renting 6 months of the year. With problems like these, you run the risk of not making more than your payments and having to cover the rest with the rest of your money.
I can understand why somebody would go into debt for that reason, but it is a little riskier than I would be willing to go. If I found the perfect property I might take out a loan for that. Just remember to do your research beforehand and really find out if you can cash flow the house before you buy.