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What’s up, everyone? Today, we’re comparing good debt vs bad debt – what’s the difference?
I’ll be primarily talking about student loans, auto loans, and credit card debt!
Basic principle of debt = It’s good unless you’re stupid or irresponsible.
It can act in your best interest or work against you.
If your rates are low, and interest rates go up, then that debt becomes an asset for you.
On the contrary, if you lock in a rate, and interest rates drop, then it becomes more of a liability.
Auto Loans
Nowadays, you see a lot of people getting 6, 7, or 8 year loans on their car.
Dave Ramsey says you should pay cash for your car. Although he has many good pieces of advice, I don’t think you should follow this one.
Don’t buy a car if you don’t have the money for it.
However, if you buy a car and get a loan with 0% APR, then you free up that much cash that you can leverage and put into cash flowing assets!
Like Lincoln said in the video…
“Anytime you get money that is 0% lent to you (0% APR), then you’re utilizing leverage to your advantage.”
So, instead of paying $50K cash for a new car, get a 5-year loan and invest your money that is set aside. You’ll always be able to make your payments, and you’ll be getting ‘X’% back on your 50K for the next 5 years!
It does not make sense to take a car loan out longer than 5 years.
Disclaimer: This is not financial advice. Do whatever you desire.
Credit Card
You should have a credit card. Treat it like a debit card – meaning, don’t spend more than you have.
Here’s some obvious pros to credit cards: the company takes the liability when fraudulent charges occur, and if you make payments, you can earn a small percentage back.
Student Loan
Student loans are becoming more and more popular, yikes!
Don’t go to an expensive, ivy league school unless you’re expecting a six-figure salary right after graduation.
It would take years to pay off $100K+ of debt on a salary of $30K.
Conclusion
Other than those things mentioned above (and a home), nothing else is really worth financing.
But, if you’re disciplined enough to finance the new iPhone, then go for it.
Just remember: In life, you need to calculate your runway.
Be completely aware of your personal cashflow.
Dave Ramsey says to make an emergency fund; I totally agree!
So, good debt vs bad debt – what’s the difference?
Good debt is taking advantage of the leverage that debt can give you, and bad debt is locking into loans that you aren’t responsible enough take on.
Hope this helps, that’s it for today!
Thanks,
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
