The economic system that we live in would simply cease to exist without the presence of the concept of debt, yet it’s not often that one sees the words good and debt together. Going statistically, if you toss a stone in the busy streets of any metropolitan, it’s chances of hitting a Hindu is 80%, a Muslim is 14%, Christian is 2%, Sikh 2% and so on, but it will more likely than not hit a person who has some or the other form of debt on him.
We are familiar with side of debt which keeps one awake in the night, but the other side of it, the good side, if used optimally can not only result in a more sound sleep, but can help create assets, save taxes and can build you a nice fluffy retirement cushion.
What is good debt ?
A good debt is a loan taken for the purpose of investment or asset building, which would put money into your pockets rather than taking away from it. For example, if a person seeks a car loan for the purpose of buying a car for personal commuting needs, it’s a bad debt, but if s/he purchases the same car and runs it as a cab, this cab becomes his asset putting money into his pocket, resulting from a positive cash flow.
Simply putting, if you are acquiring anything which is giving you an income positive to the payments which you are making to your bank or your financier, it would categorise under good debt.
How to start?
As with most new things, one must start small with good debt too. You could start with a debt amounting to a significantly small fraction of your income, acquire an asset and then see how it’s working out for you. Once well acquainted, you could expand your asset size. While at it, it is more preferable to go initially for a payment stream asset rather than a capital gains asset.
A payment stream asset creates a regular stream of payments (income) which can then be used to offset standing loans as well as to own more assets. A capital gains asset would be something which does not pay you regularly, but is expected to increase in total value eventually as played by market forces. A good example of the above would be real estate. If you lease a house with the purpose of renting it, it would come under a payment stream asset, but if you buy the house with the intent of selling it one day when the value goes up, that would categorize under capital gains assets. As you can see payment assets are more secure and would require lesser capital. Capital gains assets would require more resources, though the returns might be big, but there is always luring uncertainties like real estate stagnation or an economic crisis, like that of 2008, which can hurt your gains really hard.
Keeping the above points in mind and changing our view on debt, anyone can acquire a lot of good asset producing debts and take leverage of the economic system, becoming the unicorn in a world of ponies with a little financial guidance.
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