Debt is defined as a state of owning money. Meaning you are considered in debt if you owe any money to an entity.
So are you in debt right now? To whom? How deep in debt are you?
I used to think that being in debt is a bad thing, because to me it meant that I spent money that I don't have. I overindulged in my expenses and now my debt is an additional expense that I need to cover. My thinking that debt is bad also originated from stories that I heard when I was still young, about families being so in debt that they just spend most of what they earn paying it off. Worse they need to go further into debt just so they have enough money to cover their basic needs.
My notion of debt is not unusual as this is how most people see debt, as a means to purchase something that they can't afford with their current income. The stories that I heard were also common for most people. Some are even worse as their debts are so big that it have been passed on from one generation to the other.
However, as bad as debt may seem, it can actually be used for something good. According to Robert Kiyosaki, best selling author of Rich Dad Poor Dad, debt can be a great tool in building wealth if it is used correctly. He also called this good debt or debt that puts money in your pocket. If it is used wrongly though, it is a tool that can destroy your wealth or keep you in poverty. He calls this bad debt or debt that takes money out of your pocket.
An example of a good debt is debt you use to purchase a property and rent it out to someone. You take out a loan to buy the property, pay the down payment, then pay the rest of the loan in installments, let's say, 10 years. So every month for 10 years, you'll pay the bank a certain amount. For example P15,000 a month. So for it to be a good debt, you need to rent the property out for more than P15,000 a month. Let's say someone is willing to rent it for P18,000 a month. So P15,000 will pay for your loan and the remaining P3,000 will go to your pocket.
Monthly installments = P15,000
Monthly rent payment = P18,000
Profit = Monthly rent (P18,000) - Monthly installments (P15,000) = P3,000 (this will be the monthly income your property puts in your pocket).
An example of a bad debt is debt you use to purchase a personal car. So you take a loan to buy a car, pay the down payment, then pay the rest of the loan in installments, let's say for 5 years. So every month for 5 years, you'll pay the bank a certain amount. For example P15,000 a month. Since you'll be using the car for personal use, it won't be earning you any money, so the P15,000 to pay for it monthly will come out of your own pocket.
Monthly installments = P15,000
Monthly income = 0
Profit = Monthly income (0) - Monthly installments (P15,000) = - P15,000 (this will be the monthly expense your car takes out of your pocket).
These are just rough and basic example of good and bad debt. Bottom line though is that debt can be used to put money in your pocket (good debt) or take money out of your pocket (bad debt).
Debt is a powerful leverage that you can use to achieve financial freedom, you just have to learn to use it wisely.
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