Everyone including me in one way have been in debt or in debt currently no matter how small or big the amount is. Becoming aware of the type of debt that exist and the one you are in is very important. You need to know your financial situation if it’s awful if it needs the support of an expert or you can manage and deal the debt yourself.
When you analyze your monthly expenses, you realize how much you have accumulated through debt. After doing this analysis, that’s when you know the next step to take and how to go about it and what to do.
If the debt is well-managed and settled on time may be of positive effect on finance but if not well-managed becomes financial woes for you.
You also need to know the kind of debt you acquired. Is it the one that grows in value with time and becomes an ASSET or the one that turns out to drain you and add no value to you and becomes LIABILITY. Debt is not bad as its described, it’s how its managed and settled that really matters.
There are two types of debt:
(a) GOOD DEBT
(b) BAD DEBT
Good debt is described as anything that becomes of great value on the long run. it’s an investment with long time value it’s like buying stocks, bond and mutual fund now. It becomes a great asset that becomes invaluable. Also, it’s like borrowing money in the bank to start a business and starts paying it back from revenue generated from the business.
The interest rate is always low because of its value with time. It remains one of the best way to invest in an asset that can generate constant cash flow for you. No matter how good it is as debt, it’s risk is the inability to repay which leads to financial struggle. Good debt, if well-handled will not impact your finance negatively but helps your financial future. If you have good debt you will look for the most appropriate charges that carries lesser penalties.
KINDS OF GOOD DEBT
When you borrow to start a business, it is termed a good debt in the sense that the business ought to grow and expand with time to generate more money to pay-off the debt. with good business plan and strategy, the business ought to generate more than the loan on the long run. It’s about using money to make money and create more money.
(2) BORROW MONEY TO STUDY
Collecting loan for education is not too bad because with time, you will surely get a job that will pay you well in your life time. You will generate more in your life time than the loan you collected.
When you collect debt to build a house and its structured to make more money for you on the long run. you put it on rent to generate more money for you to start paying off your debt.
If you earn a living, an affordable car with a repayment plan is not too bad. With you, putting in place plan for the expenses too. Most times, using the car to generate little income on your way from work by carrying passengers can help offset little expenses too.
Bad debt is anything that losses value with time accumulating expenses. These can also be assets that drops in value and leads you to borrowing to pay for the debt. Most times, it occurs when people make frivolous buying with no strategy to payback leading to more losses.
KINDS OF BAD DEBT
(1) CREDIT CARD
Using credit card do accumulate bad debt for you over time. It’s easier to accumulate debt with credit card because it is faster to acquire more debt with it. using the credit card increases your interest rate. Credit card is undoubtedly a bad debt and millions of people are also caught up in this.
(2) LUXURY LIFE
Living too much luxury life can lead to debt. These are more of WANTS than NEEDS. You want them but on the long run do not need them. When you accumulate the debt, you struggle to payback.
Having no plans for your vacation, buying exquisite clothes, jewelries you don’t need because you need to show off are bad. You need a simple plan to help deal with this by saving for it than accumulating it aimlessly with no plan.
(3) CAR LOAN
This same car can be bad if the car you are acquiring is a luxury to fund your flashy lifestyle and the cost to fix it if faulty is expensive. At some point, you leave the car at home and leave to work with a cab or bus because it’s cost more, leaving you in debt. This kind of luxury car loses its value with time.
You collect this loan to solve an issue and hope to sort it out at the end of the month. This kind of debt come with higher interest rate.
There are many more good and bad debt not mentioned but the ones listed above is common among every one of us. When borrowing now, you can distinguish between the kind of debt you are into and how to deal with them or manage them. Not knowing the difference between them influence your finance woefully. You need to know where you are and what to do and how to go about it.
It is best and safer not to go into what you know less about than go into it and get destabilized financial and struggling for a way out of it for a longer time.
Do not get scared of debt when you are into it, manage, resolve it and get the best out of it in a good manner by using it to invest and earn more in the future which is a better leverage for you.