Good Debt vs Bad Debt

Perhaps few words in the English language can get as strong a reaction as the word “debt”.

  • Consumer debt makes families feel like a chuck of their their paycheck each month just disappears.
  • Debates rage about the ethical and moral implications of declaring bankruptcy.
  • Financial gurus make a big deal of cutting up credit cards on stage to “free” their audiences from the evils of owing money.

What about you? What are your thoughts on “debt”?

I suppose that the answer depends on whether or not you recognize one simple but fundamental truth about debt – there is “good debt” and “bad debt”.

In other words, I’m talking about debt that either moves your forward financially or that holds you back.

Let me give you an example.

You remember this thing?

That’s the Compaq iPaq – released in the year 2000. At the time, I was still working for my corporate overlords.

One day, I heard of couple of my coworkers talking about the fact that this item was in such demand that it was being sold on eBay for $650, even though it only cost $450 retail. One of the guys then said that he had seen a couple of these things at a store down the street.

Now, I didn’t have a lot of cash back then. So to do what I was about to do, I had to use my credit card.

I went down to the store, bought two iPaqs (putting $900 on my card) and then went home and immediately listed them on eBay.

A short time later, both units sold for $650 each – as predicted – and I paid off the card and pocketed the $400 profit.

Let me ask you – the $900 debt that I incurred – was is “good” or “bad”?

Did it move me forward or backwards?

Do you get the point?

Debt is something that can be used to propel us forward – but you have to learn to recognize the difference.

 



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