I’m a big believer in using debt to my advantage. Debt is not intrinsically bad, but that all depends on what type of debt we’re talking about.
Bad Debt
So let’s start with the bad debt. Bad debt can generally be boiled down to one culprit: credit cards. For credit card companies to succeed, their business model requires that you stay in debt, struggle to stay current with your minimum payments, or even better for them, that you miss a month. Like a lot of young people, I opened up my first credit card in college, and I was oblivious to the interest rates they were charging. I just knew that I “had” money and I wanted to spend it. Of course, I didn’t really have money. It was someone else’s. And before I knew it, I racked up four thousand dollars on that card. I spent it in an instant, but it took ages to pay it off. I wish I knew what the actual principal was, but I’m sure a lot of that four thousand was compound interest.
This is something a lot of people don’t want to hear, but I urge you to pay off that credit card debt as soon as you can. Keeping that debt will impede your financial growth. Instead of looking at paying it off as a form of austerity, think of it as a way to free up more of your money down the road. If you’re only paying the minimum, your balance will grow exponentially over time. Eliminating your credit debt will go a long way towards improving your financial health, and your future self will thank you.
Good Debt
If you were to put a chunk of your paycheck away every month into a savings account, you would be losing money. No, that is not a typo. Typically, most banks offer interest rates on savings accounts of only about one percent. That doesn’t sound great, but it’s better than nothing, right?
Wrong. It’s actually worse than nothing. While the dollar amount in your savings account would slowly climb upward, inflation would cancel out those gains. The buying power of your savings would be lessened to the tune of two to three percent, if not more. So by parking your money in a savings account, it would sit there, slowly devaluing.
The best way to make your money work for you is by investing in real estate. You would still be taking on debt in the form of a mortgage, but by investing in a cash-flowing property, your tenants would be the ones paying off your loan. In my opinion, that’s not just good debt; it’s great debt. Of course, the crucial piece here is to run the numbers first and make sure that your property does cashflow. This isn’t pie in the sky thinking. I have built my portfolio using other people’s money, and today, I’m able to pay my credit card balance in full at the end of every month.
