Becoming Debt Free

Jul 07 2007

If you are young or old, single or married, one of your main goals in life is probably going to be becoming debt free. This at least is a common ambition for most of us. And I think that has a lot to do with much of the negative press and cultural conditioning we have inherited around money and finance.

Debt is almost always considered a bad thing. Which is not always true. And unfortunately, it seems, it is only the very well financially educated or the very wealthy among us, that seem to understand the distinction between “good” debt and “bad” debt.

A few of my friends here in the states have been taking out UK loans recently, and learning about things like IVA. And something that has come up in our discussions (although I no longer work 70 hours a week in finance related project management, my friends still think I know something about it.. and are kind enough to ask for my advice from time to time about their deals) was this idea (which I always considered common knowledge) about “good” debt and “bad” debt.

It is really a simple idea. “Good” debt is debt that advances you net worth. Like leveraging the equity in your home to buy an investment property or a share portfolio. And “bad” debt is debt that does nothing to advance your situation. Like credit card debt.

If you have bad debt, you need to institute Debt Consolidation plans. And get it paid off as quickly as possible.

And if you have the opportunity to get into “good” debt, you should not shy away from the opportunity, thinking that all debt is “bad”, of the contrary you should research the investment opportunity thoroughly, look at the risk versus return equation, look at how well you understand the underlying fundamentals of the investment, look at the expected rate of return aswell as the historcial return, and if all stack up, then you should consider going for it very seriously.

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Posted by funky under Loans