Good Vs. Bad Debt

At IWBNIN, we talk a lot about reducing and eliminating debt. So this might come as a shock to you….

Not all debts are created equal and there is a such thing as good debt! Let’s break debt down into four different categories ranging from terrible to good:

1. Terrible Debt: This debt is the worst type of debt you can have. This debt includes payday loans and pawn shop loans. These loans typically have a VERY high interest rate. When I say very high, I mean that I once saw one that was 640% interest! I think we can agree that is terrible.

2. Bad Debt: This debt may not be terrible but it is still pretty bad. This includes your credit card debt, unsecured signature loans, car loans, etc. Yes you read that correctly, car debt is not considered good debt. The average new car drops in value $100 per week during the first four years.

3. Better Debt: I only classify one type of debt as better debt and that is home mortgage debt. Every time you make a payment some of this money is going into home equity so hopefully when you go to sell it, it will have gone up in value and you will have made money.

4. Best Debt: If you are going to have debt, business debt is the best debt you can have. This is where I would categorize rental properties, buying franchises, buying into a small business, etc. This type of debt will allow you to scale your business and make more money.

All debts are not created equal and there are some that are way, way worse than others. Make sure you take this into consideration any time you are contemplating going into debt so that you can make the right financial decision.

Types Of Debt

Do you feel like you are drowning in debt? Like the payments are consuming your entire paycheck and you can never get ahead? Or worse, there really is not enough money to pay for basic living expenses and cover the debt payments you owe? If you are in a situation where you do not have enough money to pay for everything, I would suggest prioritizing in this order:

1. Housing

2. Food/Prescription Medicine

3. Transportation

4. Back Taxes

5. Secured Debts

6. Family & Friends Debts

7. Unsecured Debts

As you can see, your debts would actually be addressed last. So many people are so terrified of creditors that they make sure these payments are made first. I would suggest the opposite. Once you have your basic living expenses covered, it is then time to decide which debts are going to get paid.  At this point, it is very beneficial to have an understanding of the different types of debt and how they operate.

The first type of debt you should focus on paying back is secured debt. This is debt where the lender can come take something – like a car, boat, motorcycle, tractor, etc. If the lender repossesses the item, they will sell it at a wholesale auction and then come after you for the difference.

The next type of debt I would suggest paying off would be debt to family and friends. I feel this is important because unpaid debts to family and friends have been the cause of relationship issues. It is essential to pay back these debts to avoid these problems!

The last type of debt to pay is unsecured debt. These are the debts that are screaming at you the loudest to pay: credit cards, student loans, signature loans, etc. Why are these creditors the loudest? Because there is nothing they can come take from you! The debt is not attached to anything that they can come and repossess. This is why creditors will play on your emotions to get you to pay them before anything else. I have met so many people who are up to date on their credit card payments but behind on their house payment. I do not want this to be you! Pay your secured debts first!

So go back to your spending plan and make sure that you have all of your priorities in order. If you cannot make all of your payments this month, make sure you are prioritizing and paying the most important first.

Financial Event Update: The Debt Ceiling

The Debt Ceiling….we keep hearing conversations about it, but what is happening?

Here’s a brief update:

Well, appears that the House Republicans and the president have come to an agreement and it has made it out of committee. It's going to hit the floor this Wednesday evening. That's tonight.

And when it goes there, it's going to go to a vote, end up getting reconciled with a bill from the Senate, and then it should pass. Then it will be on the president's desk, by tomorrow… maybe by Friday. But the bottom line is, it looks like they’ve come to terms.

There was a lot of saber rattling, a lot of people saying mean things about each other. That is the nature of politics. It's hard to believe that we make any positive progress. But, hey, it doesn't look like we're on default on our debt one more time and it's going to kick the can down the street for another two years.

Yay! We get to spend more money with the seemingly unlimited credit card.

What can you do:

I urge you to write your senators. Write your congressmen. Write the president. Ask them. “Hey, please, can we have a balanced budget?”

Send them the I Was Broke. Now I'm Not budget template offered by Fully Funded Life. I think it will help them greatly.