TLDR:Â Debt isnât always the villain in your personal finance saga. Used wisely, itâs like a power-up in a video game. Especially for big moves like snagging a property (hello, mortgage!). But getting into debt just to live large without any game plan for returns is a major no-go. Smart debt can be your ally, catapulting you towards those big life wins. Thoughtless debt, on the other hand, is like quicksand for your wallet. Know the difference, play it smart, and understand that getting into debt is a critical choice that requires careful analysis.
- đ§ What the Experts Say
- đ What is âGoodâ Debt?
- đŠ Consolidating Debts
- đ The Chad Takeaway
đ§ WHAT THE EXPERTS SAY
Mark Cuban and Warren Buffett had the same advice when consulted on what people could do to protect their personal finances from an economic recession.
Avoid debt.
The math is simple:Â The average APR (thatâs the annual percentage rate) that people pay on credit card debt is around 28%.
An S&P 500 index fund has a (roughly) 10% average annual return. So it means that avoiding paying that 28% APR is better than getting 10%.
But getting into the situation of having to pay that 28% in the first place is what you should avoid first.
Buffett gave this pretty obvious advice to young children: you should never spend more than you earn.
The key word here is âspendâ.
It looks tempting, right? You have good credit, after all. Give your house that new paintjob. Get yourself a new TV. Mastercard and Visa approve of that.
However, living out of your own means will send you into a downward spiral which will always be more and more difficult to come back from.
Cuban himself learned the hard way the woes of being a chronic addict to credit card debt. Once creditors start to pile up, every paycheck just vanishes in thin air.
This does not mean that credit cards are satanic devices created by the devil himself.
You should make the most of their cashback rewards or frequent flyer miles. Just remember to always pay off the whole of your bill at the end of the month.
đ WHAT IS âGOODâ DEBT?
Unless you are the son of a billionaire you probably will need to borrow money to kick off one or another chapter in your life.
âGoodâ debt is the one where you expect to use that money to get a an improvement in your net worth or a significant enhancement of your life.
âGoodâ debt is used to invest prudently. Contrast with the previous key word when we talked about credit cards earlier: âspendâ
We are not talking about a luxury vacation or getting yourself a Lambo. We are talking about something that will help you get more greens in your bag in the future. Or at least a more solid situation.
So what are some examples of potentially good debt?
Mortgages:Â This is the classic example. Buying property can be a smart play. Real estate often appreciates in value, and owning a home can be more cost-effective than renting in the long run. Plus, itâs an asset that can provide stability and potential rental income.
Education Loans:Â Investing in your brain is always a good move. Degrees or specialized training can boost your earning potential significantly. Just make sure youâre choosing fields with solid career prospects!
Business Loans: Got a killer business idea? A loan can give you the launchpad you need. If your business plan is solid, this debt could be the stepping stone to financial independence. Be careful on how much you borrow and what guarantees you give. Business is never a certainty and make sure that whatever happens you can live to fight another day.
Low-Interest Loans for High-Return Investments: This is advanced level, but borrowing money at a low interest to invest in high-return opportunities can be smart. Think stocks, bonds, or other investments, but only if you know the game. The use of leverage is generally left to the experts and requires collateral. And of course it is far riskier than an investment without debt!
The key with good debt is that it should help you grow your net worth or generate income over time. Plant a seed and nurture it into a money tree. Just be sure youâve done your homework and understand the risks involved.
đŠ CONSOLIDATING DEBTS
Now, what if you have read this article too late, and you already sunk yourself into bad debt?
Well, one option that a lot of people consider is to consolidate your debts.
This means just as simply to put all your debts into a (hopefully) low-interest loan. This will allow you to have a better record on how much you owe, while also owing money to just one entity rather than many.
Pay off everything as quickly as you can. The more time it takes you, the more interest itâll accrue and the more it will cost you.
đ THE CHAD TAKEAWAY
Managing debt intelligently is a Chad skill you cannot forgo. Especially if you are lucky enough to have access to credit on good terms.
However, how you use that money and under what terms you borrow it will make all the difference between success and failure.
Even if you canât (yet) afford all the luxuries you desire, nothing will beat the feeling of laying your head to rest without the stress of debts and loans breathing down your neck.
Donât use debt to flash cash that is not actually yours but the banksâ.
They will always want it back and more.