Debt: The Good and the Bad

So far, I may have made “debt” sound like a dirty word. But not all debt is bad. Some types of short-term debt may actually be beneficial. For instance, let’s say you desperately need a new refrigerator; the one you have is on its last leg and could go out at any moment. You know that, sooner or later, a new refrigerator is in your future. Then you spot a refrigerator on sale-slashed down in price by 20 percent. You know it’s a real bargain because you have been carefully watching the prices of refrigerators.
There’s only one problem: You don’t have the cash for the refrigerator right now, but you will have it in a couple of weeks or so. In this case, it might be wise to go ahead and use your credit card or store financing, so you can get the refrigerator at the lower price. If you pay off the
debt entirely when the bill comes, without incurring additional interest charges, you will come out ahead on a purchase you had to make anyway. (Ideally, use a card with at least a 30-day grace period before interest is charged.)
Another type of good debt is the money you borrow to make more money. I’m not talking about taking big risks here; I would not recommend getting a $1,000 cash advance and taking it to the dog track or casino! But if you are thinking of borrowing $1,000 for a home computer system that you can use to start a part-time word processing service, then the temporary debt may be worth it. Just make sure you have a good chance of earning back more than you spent, and use your first profits to pay off your debt.
Ideally, I would rather have you wait until you have saved enough CASH to start your business from savings. If you have moneymaking work in hand, however, this may be impractical. So you must earnestly weigh the cost of waiting against the TOTAL COST (principal plus interest)
of getting started now. Then make the financial decision that moves you toward debt freedom faster.
Is a mortgage a good debt or a bad debt? That’s a controversial subject and you will hear varying opinions. Personally, I would rather see you become completely debt-free –and that includes mortgage-free, too. But few of us can afford to purchase a home without a mortgage.
And we all have to pay for some kind of shelter, whether it’s in a home we own or one we rent. Later in this book I will explore several ways you can pay off your mortgage early. Before you use any kind of credit, take a careful look at the type of debt you are about to
incur. Use the following comparison list to help you determine if the debt is wise or unwise for you and your goal of financial independence:

Relatively “Safe” Debt Is For Items…
· You absolutely need
· That are tangible
· You must buy eventually anyway
· Have lasting value, or will appreciate in value or will help you make more money
· You buy after careful consideration
· You will be able to pay off quickly, preferably within one month

Generally Unsafe Debt Is For Items…
· You don’t need
· Are intangible, such as entertainment
· You would not buy if you had the cash
· Have no lasting value or are everyday consumables
· You buy on impulse or to lift your spirits
· You will not be able to pay off relatively quickly

Why Debt is Like Quicksand
Debt is a trap that snares even the most intelligent, well-meaning people. It’s like quicksand because, once you step in, it doesn’t take long before you are sinking. Anyone can fall into this mire. No one is immune to the constant lure of easy money, the fleeting rewards of instant gratification and the monthly temptation to pay the minimum due and worry about the rest of the balance another day.
Credit is big business in this country. And, like any other big business, it is heavily promoted. The car dealer promises to let you take home that shiny new car today if you will take his in-house financing –which is probably the most expensive way to buy a new or used car.
Credit card companies offer all kinds of alluring incentives to get you to use your plastic more often. Finance companies tempt you with “quick and easy loans” that sound like the answer to all your problems … until you do a little math and see that the high interest rate will just drive you further into debt and further away from all your hopes and dreams.
You would have to live in a steel-encased cave to be protected from the continual onslaught of the credit purveyors. It’s no wonder so many people fall into the debt quagmire so easily. Take credit cards, for instance. As mentioned before, it’s just so easy to pay the minimum every
month. It can take years to pay off one purchase this way… and the interest is staggering. Credit cards also trap you by making it too easy to borrow money. In fact, some people barely realize that they are borrowing money when they use their plastic! Don’t have enough cash? Flip out that plastic. But let the buyer or in this case the borrower beware: Sooner or later you WILL have to pay for everything you buy with credit cards. The question is, do you want to pay for your purchases now, all at once, or slowly and painfully over the next five years? Do you want to pay for those purchases now, in cash, or do you prefer to be in financial bondage for an indefinite length of time?
Automobile loans can become traps, too. Let’s assume you get a 4-year loan at 14 percent interest… not the best deal in the world, but very common. What happens after the loan is paid off? Most people go out and buy another car with borrowed money (if they don’t do so before the four years are up). They become accustomed to making a monthly auto loan payment. It’s in their budgets, so they don’t see any problem with keeping it there by borrowing for their next car. In most cases, their new loan is more than the one they had before. But that doesn’t seem to bother them. They figure, “What’s another $20 or $50 or $100 a month?”
The problem is simple: That debt load, even if it seems painless, is eroding their wealth-building potential. We’ve said it before, but it can’t be stressed enough:
You Can Never Achieve the American Dream If…

You Are In DEBT!
Debt, unless it is the positive kind (and even that kind must be in limited amounts), will always stand between you and your financial freedom and independence. But you are in the process of doing something about the constant downward spiral of negative debt. You are getting closer to getting that debt under control, so you can build your wealth and live the way you really want to live.