Saturday, October 3, 2009

Good Debt Vs Bad Debt

How many of you are without debt? I believe most of you will be in some form of debts, like having a housing loan, studying loan, car loan, instalment etc. So are debts necessary to be bad? You are will surprise that I will say no. No all debts are bad.

Bad debts are created when you need to pay out monthly instalment on non-lasting items. These items normally will depreciate in price and will be of zero value after reaching its life span. These items also do not generate income, but make you pay more in term of interest.

For example, you bought a home theatre using a monthly installation plan. After the life span of your home theatre, say 5 years later, the value will be gone to 0. This is bad debt as you need to pay interest for something that does not generate any income for you.

Good debts are created when you buy thing which can generate income for you.

For example, you buy a house and have to pay $2000 for monthly instalment. But you manage to rent out your house for $3000, you are basically earning $1000 each month. This is as good debt as your house is generating income for you. If you're thinking of doing that you may read my post "Is Condo consider a good assets?".

2 comments:

e.Howl said...

How about if I pay using 0% installment plan? Doesn't this help to free up cash flow?

Freedom Achiever said...

Hi,

If there is no interest incurred in your installment plan, then it will not be consider as debt. Debts always make your pay more than the original price of the item, normally in term of interests.

It is good to have 0% interest free plan, as you need to pay partial amount instead of the full sum, which help to free up cash flow. The free up cash can be used for other thing. But be careful of any hidden charges that are not known to you. And also, remember to pay up promptly for your installment as penalty such as late charges might be imposed on you.

Regards

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