USE DEBT TO GET WEALTHY | The Difference Between Good and Bad Debt


What’s up guys it’s Finest Finance here! You have probably been taught that you should
try to avoid taking debt. Schools teach us that debt is bad, your parents
tell you that debt is bad and some financial gurus tell you that debt is bad. But did you know that you can also use debt
to get wealthy? Today I will show you the difference between
good and bad debt, some examples of bad debt and some examples of good debt! Stay tuned! Sorry if I sound like a vacuum cleaner, I
have the flu. So hit the like button cause as we all know
1 like=1 prayer. All jokes aside, let’s get started with
what is the difference between good and bad debt? Shortly put, if you make money with your debt,
it is good debt, and if you lose money with your debt it’s bad debt. Another definition for good debt could be
that it’s an investment that will grow in value or generate income long-term. So what you consider good debt depends on
the definition, with the first definition student loan would be bad debt, because it
takes money out of your pocket, but with the second definition student loan would be good
debt, you are taking debt to graduate, which increases your value as an employee, and it
most likely raises your future income too. In this video, however, I want to show examples
of good debt that fall under the first definition, where you use debt to get wealthy. But what is your opinion on this, do you think
student loan debt is a good debt, or is it a bad debt? Let me know in the comments! Let’s first show some examples of bad debt
before we move on to the examples of good debt, so you can see the difference between
good and bad debt. The definition for bad debt was that you are
losing money because of your debt. Examples of bad debt are things like car loan,
credit cards and consumables. Cars lose value immediately when you drive
them off the lot. You will also lose money on repairs, fuel,
insurances and so on. This means that a car is a liability, so it
only takes money out of your pocket. Credit cards are also a liability, they have
very high interest rate, and they don’t generate you more income. This doesn’t mean that you should cut up
your credit cards, but use them correctly, not for some useless spending. Credit card reward programs can offer you
great benefits, which is one good reason to use a credit card. But if you are a shopaholic and know you can’t
control your spending, try to avoid credit cards. And lastly, consumables obviously only make
you lose money, so they are a liability, meaning that they are bad debt. So those are three examples of bad debt, let’s
now take a closer look at examples of good debt. Now for a good debt we are using the definition
that it makes you money, meaning that you use debt to become wealthy. One example of good debt is investing the
borrowed money. You could buy stocks or real estate, that
generates you more income than what you have to pay for the costs of the debt. Using other people’s money to invest is
called leveraging. Let’s take a closer look at how leverage
works, and how you can use debt to become rich. Let’s say that you have $10,000 that you
can invest. You invest all your money in a company that
has an annual dividend yield of 5%. This means that every year you will receive
$500 of dividend. But what if you were using other people’s
money to invest? Let’s say for example that you borrowed
that $10,000 with annual costs of 2%. Again, if you invest that $10,000 to a company
that has an annual dividend yield of 5%, you will receive $500 of dividends every year. The annual costs for the debt are 2%, meaning
that you have to pay $200 every year for the lender, meaning that you will profit $500
– $200=$300 every year. So the debt is making you $300 every year,
meaning that it is a good debt. Another great example of good debt is Smashing
that like button! It costs you zero dollars, and helps my channel
to grow, which means more useful videos to everybody! Anyways let’s show one more example of good
debt, investing in real estate. Rental properties are assets, meaning that
they put money into your pocket. If you are making more money from rent than
what you are paying for the debt, you are using good debt. Let’s say you make $500 every month from
rent, and the costs of the debt are $300 every month. This means that you are profiting $200 every
month, meaning that you use debt to become wealthy. If the tenant moves out and you can’t find
a new one, you have a bad debt, because you are paying $300 every month, but you are not
receiving any money. Now before you go and take that $100,000 loan
to buy some stocks, let me warn you about some risks that leveraging has. Before you invest in anything, make sure you
know what you are doing. The biggest risk is that the return on investment
is less than what you have to pay for the lender. For example, if you can’t find a new tenant
that pays you $500 every month, you still have to pay that $300 interest every month. You always have to have money to pay the costs
of the debt. While debt multiplies your reward, it also
multiplies your losses. Let’s say for example that you have $10,000
and you take a $90,000 loan to buy a real estate property. Now the price drops 10%, how much money did
you lose? 10%? That is what it looks like first, but no,
you don’t lose 10% of your money, you lose 100% of your money! You lost $10,000 which doesn’t sound that
much, considering the fact that the property cost $100,000. But if you sell the house now for $90,000,
and you have $90,000 debt to pay, it means that you lost everything! Not to mention if the price of the house drops
20%, you would lose everything and still owe 10k to the lender. Remember that you always have to pay the borrowed
money back, unless you’re running a company, when you can declare bankruptcy. If you owe some money, make sure to check
the top right corner for a video to learn how you can pay off your debts using debt
snowball, or debt avalanche. Let’s briefly summarize the main points
of the video. Bad debt means that you are losing money,
and good debt means that you are making more money. Examples of bad debt are liabilities like
cars, bad use of credit card and consumables. Examples of good debts are using leverage
to invest in assets, like stocks and real estate for example. Always study before investing, because using
debt to invest has its own risks – while debt multiplies the reward, it also multiplies
the losses. If you want to know how to invest in the stock
market, check out the video on the screen for a step-by-step guide. Also smash that like button and share the
video to help my channel grow! Subscribe if you are interested in personal
finance, investing and book summaries! My name is Finest Finance, have a nice day
and I’ll see you in the next video!

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