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How to Become Debt Free: Good and bad debt

By Edited Dec 6, 2013 1 1

The question of how to become debt free is a good one – a simple one to answer, but it's something which eludes the vast majority of people. It's true there are two types of debt – good debt and bad debt, but what people are referring to when they talk about becoming debt free is the bad type. It's the type of debt that includes car loans, boat loans and credit card debt. The good debt includes debt which was used to fund investments, like real estate and share investments, which return an income which is equal to or more than that required to service the debt.

Many people would really like to know how to become debt free – but the truth is they already know how – increase your income, reduce your expenses and hey presto, there you go. Another way of saying that is to stop incurring new debt, and increase your income so that you are able to put extra money on the debts to reduce them, and pay them off. The reality is though that if you are really smart with money, you won't become debt free.

Money Tree (36403)

Why I won't ever be debt free – and I love the idea!

If I was ever debt free, it'd only be for a short period of time – probably till I realized I was debt free! I plan to continue to use other people's money to buy investments for myself to earn even more money – what am I talking about? All forms of income producing investments – take investment properties for example. Say I borrow money from a bank and buy an investment property, and I have people living in that property who pay me rent. I'd have the property positively (or at least neutrally geared) because that's my investment strategy – so there's no money coming out of my own pocket to pay off the mortgage on the property.

So to explain that another way – the bank lends me money to buy a house which people pay me to live in. The rent I receive is enough to make repayments on the loan – so I don't have to worry about it. Nice huh? All the while, the rental income reduces the amount owing on the mortgage, building my equity in the property. And let's not forget any capital gains – although they shouldn't be expected, an increase in value will be a great thing – increasing your equity. Alternatively a decrease in the value of the property won't make any real difference, because you're still able to service the existing debt and pay down the loan thanks to your wonderful tenants. So next time you find yourself wonderful how to become debt free – consider getting rid of the bad debt, and investing in the good. Enjoy!

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Comments

Dec 31, 2010 10:57am
southerngirl09
Good information on becoming debt free. With real estate prices being low this might be the time to invest in real estate. Thanks for sharing.
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