Debt is bad!!! Or that's the message you hear most often. But I'll let you in on a little secret - you actually get two types of Debt: Good Debt and Bad Debt.
Good debt is the debt that you enter into when you're using other peoples money (OPM) to build riches for yourself. This would be things like buying property (the bank's money) and renting it out or starting a profitable business (investor or shareholder money). As long as you're making more money than the cost of repaying the debt, this type of debt is seen as good debt. Caveat : There is a Danger - Good debt can turn into Bad Debt overnight - so always know that there is a certain amount of risk attached.
Bad debt is typically termed Consumer Debt. It's the Credit Cards, the Mortgage on the house that you're living in, the Car and the various clothing accounts you have. If you're not making money with whatever you've purchased with that debt, it is seen as a bad debt. And bad debt is just that : BAD for you. It has a stranglehold on you, and it can lead to major depression.
One of the ways to become financially free is to get rid of the Bad Debt as quickly as possible, and convert it into Good Debt. The moment you do that, you'll have more money in your pocket at the end of the month. Do yourself a favour. Look at your Income and see how much money is going to debt. Most people will be shocked to see that it's usually a higher percentage of their income than they expected . What if you had that money all to yourself, instead of it going into other people's pockets every month? Just imagine what you could do with the extra available cash!!
Most types of debt are very expensive, because this is how those companies make their money when they've got you in their clutches. The longer you are in debt, the more money they make off you in interest. It's sickening if you start doing the math on how much debt really costs you. If you have a $1000 dollars for a 1 year period, you'll be paying $100 extra in interest (at a rate of 10% interest on a flat rate). The major danger is that very few companies give you a flat interest rate - most implement compound interest. If you take that same $ 1 000 over a 1 year period at a 10% compound interest rate - you end up paying an extra $ 109. Now $ 9 doesn't sound like a hell of a lot - but it gets pretty hair raising if the period is longer and the amount of money is larger (think about your mortgage). A simple example - if you manage to pay 10% more than your monthly repayment every month on a 20 year bond, you can reduce the repayment period by anything from 2-5 years.
And it gets worse with credit cards because they charge really hefty interest rates. Most people only pay the minimum amount. So you end up being in debt for longer at a compound interest rate. Isn't this a wonderful scheme to have you pay back much longer and much more than you need to? This means more money in the credit card companies pockets - and less for you. And that's not taking into account that most people tend to spend the money they've paid into the credit card as soon as that money is available as credit again.
The best thing to do is to pay off these debt's as quickly as you can. You can also look into something like Debt Consolidation to help you get out of Debt quicker.
How debt consolidation works - it converts all your expensive debts into a one cheaper debt - something that has a smaller interest rate. It is critically important that once you consolidate your debts, you pay off this debt rapidly as you are able. If Debt Consolidation is done correctly, you will have more money available from the debts that have been consolidated . DON'T spend this money on other stuff, rather push it back into your debt, and get it paid off as quickly as possible.
Once you're rid of all your Bad Debt, you can start your path to financial freedom, by going into Good Debt, like buying Property and renting it out.Change your mindset on how you handle debt, and it will change your life forever.
Gerard Korsten's website Debt Consolidation Web is a resource to help you find the information you need on the various methods of getting rid of debt, and converting it into Good Debt.
