Today on the Finance Flash Go! podcast, we wade in tricky water…discussing good versus bad debt!
Can debt be good? Or it all bad? These are important questions to ask.
A straw poll of most people would likely reveal an overwhelming majority who believe that all money owed is bad.
I wouldn’t be surprised to find that an even greater majority of physicians believe that all debt is bad. We spend so much of our lives under the burden of student loans. Physicians also notoriously use borrowed money to finance the lifestyle and gratification that they have delayed for so long.
So what is good debt?
I’ll borrow my definition from Robert Kiyosaki in his book, Cashflow Quadrant.
Debt is good if you are compensated or paid for taking it on.
You may be screaming at the computer or phone screen right now saying that this is not possible. When we borrow money, we have to pay interest on top of the principal. So, how the heck would we get compensated for the debts that we take on?
What is bad debt?
Well, it’s the inverse of good debt.
Therefore, it’s debt that you are not compensated or paid to take on. I would venture to guess that most of the debt that most physicians think of fall into this category.
You can use good debt to improve your ability to accrue income producing assets.
This is my favorite use of debt.
Let’s start with an example from my life. My wife and I bought a duplex for $174,500 using 25% down. Thus, we owed about $130,000 on the mortgage when we closed. We increased our debt by six figures!
But…that’s not where the story ends. Every month, our tenants pay rent. This rent covers our mortgage. It also covers all other expenses like taxes, insurance, and maintenance. There is also extra that we put (usually tax-free) into our pockets.
There is no better example of getting paid to take out debt than investing in cash-flowing real estate.
I don’t think anyone can argue that this is bad debt.
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