Good Debt vs Bad Debt. Must Read

When I was 22, with no knowledge about Personal Finance, I bought my two-wheeler motor vehicle on a mortgage. I was in Debt.

It looked easy initially, to pay for the mortgage every month. Although I didn't face any problem throughout the year, while paying for the mortgage, I used to feel bad about a fixed amount being deducted periodically from my Bank Account automatically, every month.

Least I knew about the difference between Good Debt and Bad Debt. I had to pay for the mortgage every month till next year. Month after month, the amount was auto-deducted, and finally I completed paying the total amount I had borrowed.

I was happy. No longer, any amount will be deducted from my Bank Account.

Next year, I decided to change myself as a person. I realized, the best way to do so is by Reading Books. Tons of Books.

Reading Books is like Reading Experiences. An author summarizes his experiences, his mistakes in a Book. And when you read a Book, you get experience of different circumstances an author went through, without actually experiencing them.

I started Reading Books. Initially it was very difficult to find the topics I like. I wasn't an avid reader.

I came across some Personal Finance related Books. I realized that I like Personal Finance topic very much. I started reading more Personal Finance Books.

Books like Rich Dad Poor Dad, Richest Man of Babylon, The Intelligent Investor and many more. I used to read a book when I was travelling, waiting for someone, standing in a queue or whenever I get any fraction of leisure time.

While I was following Personal Finance topic, I learnt many lessons summarized by authors of such Books. One of them was the difference between Good Debt and Bad Debt.

Buying a motor vehicle on a mortgage was a mistake. It's a Bad Debt.

Borrowing Money puts you in Debt. If the Money borrowed is used to make more Money, then it’s a Good Debt. Else it’s a Bad Debt.

Buying a motor vehicle on mortgage is a Bad Debt. It doesn't put Money in your pocket. It is for your convenience, and with Taxes, Insurance and Fuel expenses, it takes out Money from your pocket.

A Good Debt is something, which puts Money in your pocket. Borrowing Money to build an Apartment and renting it, is a Good Debt. The mortgage helps you in constructing an apartment, that puts Money in your pocket.

So we can say:

A Good Debt is a Debt that is used to buy Assets. Where as, a Bad Debt is a Debt that is used to buy Liabilities.

I realized my mistake of taking a mortgage to buy a motor vehicle, which was a Bad Debt.

This made me change my thinking as far as mortgages are concerned. Whenever I take a mortgage, I question myself whether I will be in a Good Debt or a Bad Debt, based on the reason for taking a mortgage.

Question yourself before taking a mortgage. Think about it from a Good Debt vs Bad Debt perspective.

A Good Debt will pay the mortgage by itself. Bad Debt will empty your pockets.

Conclusion:

1. Good Debt is a Debt which is used to buy Assets

2. Bad Debt is a Debt which is used to buy Liabilities

3. Assets are something that puts Money in your pocket

4. Liabilities are something that takes out Money out of your pocket

5. Question yourself before taking a mortgage, whether it's a Good Debt or a Bad Debt

6. Good Debts will help to pay for the mortgage on its own

7. Bad Debts will empty your pockets



Originally published on FinCalC Blog