Good Debt vs. Bad Debt – What’s the Difference?
If you’ve ever struggled to keep up with all those monthly payments including the credit card and car payments, you’ll want to tune in to this important article…
More and more people are getting swallowed up by debt. I’m sure you’ve read and heard many of the statistics and stories in the news. One of the keys to financial independence is to get rid of your bad debt and acquire good debt.
Bad debt is debt that makes you poor, such as credit card debt, car loans, etc. – this is consumer debt. Good debt is debt you acquire that actually works for you. The best example of good debt is a mortgage loan on a rental property that throws off positive cash flow every month. Good debt is money that you borrow to purchase assets that put money in your pocket.
Steps to Eliminate Your Bad Debt and Acquire More Good Debt
Step 1– Stop accumulating bad debt. Whatever you purchase via credit cards must be paid off in full at the end of each month. No exceptions.
Step 2 – Make a list of all your consumer (bad) debts, this includes each credit card, car loans, and any other bad debts you have acquired.
Step 3– Refinance your mortgage to consolidate your high interest debts. Chances are you’ve built up enough equity in your home to pay off your high interest credit cards and consumer loans.
As your mortgage advisor, I can help determine how much equity is available and how much you can save by increasing your mortgage balance to pay off bad debts at lower interest rates.
Step 4– Explore the option of using additional equity in your home to increase cash flow. After you consolidate your bad debts you may still have equity left over to invest in a secure cash flow producing asset.
For example, the equity could be invested in a First Mortgage Fund that earns 9% interest. With a home mortgage interest of 5% the net return on this investment would be 4%. That return can be left to compound or withdrawn every month.
Step 5– Pay yourself first. Put aside a set percentage from each pay cheque or each payment you receive from other sources. Deposit that money into an investment savings account. Once your money goes into the account, NEVER take it out, until you are ready to invest it. Now – instead of just paying creditors – you’re paying yourself for only one type of purchase: assets that give you positive cash flow each month. By adopting this as a consistent habit you will be out of the Rat Race faster than you ever dreamed!
I look forward to hearing about your success stories as you apply these financial principles to your life.
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