Debt- The Good and The Bad

Debts- who doesn’t have any? Is it wrong for a person to have debts? Does it make you a bad person if you have a lot of debts? Well, if you’re the type who likes to borrow money and not pay it back- then people probably don’t like you that much. I know I wouldn’t. So is it wrong for a person to have debts? It depends. It depends on why you’re in debt and what kind of debts you have.

Borrow and Give
http://www.prayers-for-special-help.com/bible-verses-about-money.html

Being in debt isn’t necessarily a bad thing. Borrowing money isn’t a bad thing. In fact, even big companies like SM and Ayala Corporation borrow money to finance their business.

Debt when used properly can be a good thing. Use it for the wrong reasons, and you’re sure to land in trouble. There are two kinds of Debts. There’s the Good Debt, and the Bad Debt.

When is Debt Good?

Yes. Debt can be good. Debt is Good when used to generate more income or cashflow. When you use it to acquire income generating assets that will add to your net worth in the long run. A good example of this is when you borrow money to start a business. Yes, the money you borrowed will incur interest, but in the long run, if the business performs well you will make more money than what you borrowed. Even the most established companies like Ayala and SM use debt to finance their business expansion needs. They don’t go to a rich man and ask for a loan though. They issue Corporate Bonds with a fixed interest rate, and a fixed term.

Getting a housing loan is also considered a Good Debt because you are using it to buy something that you need. Though when getting a loan for a house, there are a lot of things that you need to consider first like payment terms, your ability to pay, and reason for buying the house. Taking a loan for a house requires a lot of planning, and preparation.

Luke 14:28 “For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?”

Some people also use debts to buy land and other assets that they will use for income generation. A car loan for example can be a good debt if you’re using it to buy a car that you will use it for Car Rental or for Public Transportation.

When is Debt Bad?

If there’s a Good Debt, then there’s also a Bad Debt. If a Debt is considered good when used to acquire income generating assets that will add to your net worth, then a Bad Debt is the exact opposite. A Bad Debt is in fact, the most common debt there is, specially in the Philippines and other countries where Financial Literacy is low.

Common examples of Bad Debts are Credit Card Debts, personal loans to pay for local trips or trips abroad, the latest gadgets and clothes- you get the idea.

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A lot of people who don’t have enough money but can’t wait until they have enough to pay for their desired purchase usually end up borrowing money from someone, or using their credit card to pay for that fancy meal, the latest phone or home appliance that they have been drooling over. This is one of the main reasons why a lot of people end up broke even after working for so many years in their home country or abroad.

How can we avoid getting in Debt? 

Simple! Don’t spend more than what you can afford. If you can’t afford it yet, don’t buy it. If you can’t buy it in cash, you can’t afford it. Period. If you want something but can’t afford it yet, save for it or wait until it becomes cheaper and falls within your budget.

Don’t aim for a lifestyle that’s clearly beyond your budget. Live within your means. Don’t be too caught up with the latest trends in fashion or gadgets just to be with the “in-crowd”. Focus on your long-term goals. What’s the point of having all the nice and pretty things now if you will not be able to afford a meal tomorrow?

Work on improving your current situation and invest for your future first instead of going broke trying to look rich.

“A Rich man can pretend to be poor forever, but a poor man can’t pretend to be rich forever” – WealthMotivation.Com

If you’re already in debt, make sure that you don’t incur any additional debts until you’ve paid off all of your debts.

In summary, debts are not necessarily a bad thing. When used properly it can help you increase your overall net-worth in the long run, but when used incorrectly will also lead to financial ruin. But if you can avoid being in debt, then life would be so much better for you, mine included.

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