Good Debt Management depends on many factors: your ability to manage your family expenses, your ability to save, and more importantly, whether you understand the difference between debt that is good and debt that is bad.
Good Debt VS Bad Debt
What is Good Debt
It is a type of investment and leverage: it is used to make more money and increase your net worth or cash flow. Good debt increases your future earnings and may build your passive income. It could be used to secure a discount that can be converted to cash. Examples include an investment on your education and startup capital for a business.
It fulfills two major criteria: value and leverage.
Value – The value of your purchase must exceed the value of the loan by a safe margin. Debt must be used with the purpose of accumulating wealth, and not for present consumption.
Leverage – Does the loan self-amortize through favorable terms, be it in the use, rental, operation or resale of the asset?
What is bad debt?
Bad debt results from the usual consumer spending; it is used for present consumption, and has no future value. Bad debt decreases your net worth or cash flow and does not reduces your future earnings. Examples include car leases and credit card debt.
Make use of leverage
Leverage is a way to do more with less. What separates the rich from the poor? The rich understand the importance of the six major factors that affect wealth: income, expense, asset, liability, management and insurance.
The ability to use debt is one of the main reasons why the rich get richer. And the inability to use debt is one of the main reasons why the poor get poorer.