“Good” Debt vs. “Bad” Debt, Is there such a thing?

Is there such a thing a “good” debt?  Absolutely.  What most people don’t understand, even those with a lot of financial knowledge, is that a mortgaged home in which you live is considered bad debt.

Many people do not like this answer.  They usually respond with, “Yes, but my home is an appreciating asset, how can it be considered bad debt?”

Well, let’s first define the difference.

Good debt: Debt that makes you money

Bad debt: Debt that costs you money

“Yes, well, my home is making me money, because it’s appreciating in value,” is usually the response I get when I define the two to my clients.

Here’s the problem: Until the “dead equity” is harvested through the sale of your home, or the money is borrowed out and put to work, the equity just sits there (this is why it’s called “dead equity”). Your house is not making you any money.  You cannot take the equity out to invest in other money-making ventures. Yes, your home is appreciating in value, but it’s not available for you RIGHT NOW to spend.  In the meantime, you must pay taxes on the home, do maintenance, pay interest, do improvements, etc. etc.

If the house can be converted to include a basement apartment, for example, or some other legal revenue-generating resource, then arguably a mortgaged home in which you live could be considered something other than bad debt.  But not until.

Your Home is Your Largest Lifetime Expense

The point here is that for most people, their home is their largest lifetime EXPENSE (sometimes incorrectly referred to as an investment).  Assuming that one day a homeowner wants to live in a house that is paid for, the equity becomes a comfort but is still not an asset that can be used to make more money and to increase cash surplus until it is sold.

For a home mortgage to be considered good debt, it would have to be a house in which you do not live.  Many financially literate people will get a mortgage for such homes, fix them up in a fairly short amount of time, and resell them at a higher price.  Thus, they pay off the mortgage quickly and make a return on their investment in a short amount of time and this increase can then be used to purchase more properties or invested elsewhere to fund retirement or provide more cash flow for future projects.

Many executives who have been less than thrilled with how their deferred tax retirement plans, such as 401(k)s and IRAs, have performed in the market over the last several years are beginning to see the merits of building up retirement through real estate investing.  With the housing market such as it is these days, in many parts of the country, several good properties can be had at a much lower price than they once sold for, making it possible to purchase properties, get them ready to sell, or fix them up to rent out for a guaranteed monthly income.

The financially savvy are those who live in homes that are entirely paid for and only have short-term mortgages for homes they rent out to others.  They are sure to pay off the mortgage quickly using the monthly rent money they collect from their tenants.

Mortgage = “Death Grip”

Remember, “mortgage” means “death grip” in Latin.  That’s why we advise our clients to quickly pay off their 30-year mortgages (bad debt) in 9 years or less using Power Down principles (learn more at www.mymoneyplan.net).

If you do not have a mortgage on the home in which you live, congratulations!  Now, have you considered what you might do with all the interest expense you are saving by having paid off your house?

If you haven’t considered using some of that saved money to get into some “good” debt for a while to help you make even more money, now is the time to explore that possibility.  Find out how by learning about Money Mastery Principle 10 at www.moneymastery.com or call me directly at (888) 292-1099.

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