Good debts and how they come about
Good debt – hmm… is that possible? Yes, it is. But to be quite honest, the term “good debt” is a bit misleading. So here is an explanation how I understand it with good debts.
What are good debts – a definition
Good debts – as I call them – are investment debts. Here is a more precise definition on my part: Investments are goods or commitments that are made or bought with the intention of making a profit through cash flow or resale. Or simply put: You have debts in your wallet 🙂 by buying things to make a profit. Investments can be shares, funds or interests in companies. If we draw a larger circle, this category also includes art objects, antiques and real estate. Whereby real estate primarily generates profit when it is rented out. So if you buy an apartment and rent it out, you generate cash flow through rental income.
If someone has the possibility to rent an apartment and can generate rental income, then it may well be that this person earns good money month after month. It is therefore additional income. And here I want to insert something else.
Whoever has additional or higher income is not protected from indebtedness. Rather the attitude towards debt than the money in the account decides who can handle it.
If you get into debt with 1,000 Dollars a month because you always spend everything, you will also get into debt with 10,000 Dollars a month.
If you buy a property for your own use, you should pay attention to a few points. So the purchase price is important for your own wallet, but also the development potential and the amount of expenses for maintenance and care play a role. Because the latter you have to pay as a self-user from the already taxed income. The one who rents the apartment has a few advantages. You can deduct the financing costs and also the maintenance costs. As a landlord, you can also pass on the costs for electricity, water, heating and waste disposal to the tenant. It’s really nice.
But real estate is not the only positive debt. Capital goods can be:
- Corporate investments
- Art and antiques
- Classic cars or other collector’s items
Some of these plants are more or less profitable. And it is important to note the following: Inform well, invest wisely. If you are not familiar with art, antiques and cars, you should definitely not invest your money here. One factor is particularly important for real estate: location, location, location
No loans for investments
You might now get the idea to take out a loan to make investments. I strongly advise against it and mean only: “hands off !!!” There is one and only one very important principle to consider. This is:
Never spend more money as you have.
NEVER – never and that applies without exception. Not for a smart phone, not for home furnishings, not even for a cup of coffee. Because this way of thinking – buy today, pay tomorrow – puts you in the debt trap.
I can’t repeat it often enough and that’s why I dig around like a dentist in a hollow tooth – consumer debt is bad – investment debt (according to my definition above) is good. Spending the money sensibly and well-informed on investments leads to an inflow into your wallet and thus closer to your goal.
What are other good debts? You will find out in the next post.