top of page
Search

How to Become Rich? Use Debt!

We all have heard the statement “get out of debt”, and that “debt is bad”, but what if you discovered that debt can be good, and can secure you the life of your dreams?

Debt generally is a stressful and bad thing to have, it leaves you with sleepless nights and days of overthinking, trying to find a way to get out of it. It can either propel you towards your financial aspirations or drag you into a cycle of stress and uncertainty. Understanding the difference between good debt and bad debt is essential in making informed financial decisions. In this blog, we'll delve into the concepts of good and bad debt and equip you with the knowledge to navigate your financial journey.




Recap of Assets Vs Liabilities:


In the previous blog, we discussed the difference between assets and liabilities, where assets put money in your pocket, and liabilities take money out of your pocket.


Liabilities are converted to expenses you pay on monthly basis. Just like a car loan, you finance AED 150,000 to buy a car, and you repay the same amount plus interest over a duration of 4, with a fixed monthly payment of AED 3,750 for a 5% annual interest rate.


Assets are converted into income that is paid to you on monthly or yearly basis, just like a business you started, and it pays you AED 5,000 monthly for instance.


Bad Debt: A Trap to Avoid


Bad debt is essentially borrowing money from someone, or some bank, to buy liabilities or things that depreciates with time. This debt is converted into monthly expenses you have to regularly pay on a couple of years’ period. A good example of bad debt is car loan, the moment you start the car and drive it, it’s price drops by at least 10% on spot. Another example is using your credit card to travel, you enjoyed a couple of weeks that ended in a glimpse of an eye, and you end up with a couple of thousands that need to be repaid to the bank.

Bad Debt can be paid in installments or as one payment depending on whom are you borrowing from and what are the debt terms and conditions.


Good Debt: Your Way to Riches


Good debt, on the other hand, is a debt that is used to buy money generating assets that puts money into your pocket on a regular basis. This debt is converted into monthly or yearly income that exceeds that expense associated with the debt itself. Here is an example to make things clearer, I will use the same example mentioned in the Recap of Assets Vs Liabilities, you borrowed a AED 150,000 with a 5% annual interest rate for a loan duration of 4 years, you monthly payment is AED 3,750. You use this money to start a business that generates AED 5,000 monthly, you end up with AED 1,250 comes to your pocket every month.


Bad Debt

Good Debt

Loan Terms



Loan Purpose

Buy a car

Start a Business

Amount

AED 150,000

AED 150,000

Interest Rate (Variable)

5%

5%

Loan Duration (Variable)

4 Years (48 Months)

4 Years (48 Months)

Total Payable Amount

AED 180,000

AED 180,000

Loan Cash Flow

Monthly Loan Payment

AED 3,750

AED 3,750

Income Generated from Loan

AED 0

AED 5,000

Total Cash Flow

-AED 3,750

AED 1,250

Value of Loan Purpose after 5 years

AED 90,000

AED 500,000

Note: This table is used for demonstration purposes and clarifying an idea only, and doesn’t constitute any financial plan. The numbers in the table are assumed and are variable depends on the banks, countries and it’s used interest rates.


The above table proves that it doesn’t need money to make money, it needs financial education and skills to make money. Even though the concept looks very appealing and easy to do, you need to have the right mindset, skills and education to be able to identify and choose income generating assets that are sure to make you money.


In Conclusion:


Understanding the distinction between good debt and bad debt is a cornerstone of financial literacy. While good debt can empower you to build wealth and achieve your goals, bad debt can hinder your progress and limit your financial freedom. By making conscious borrowing decisions, focusing on responsible repayment strategies, and continually educating yourself about personal finance, you can harness the power of good debt while avoiding the pitfalls of bad debt. Remember, your financial choices today shape your financial future tomorrow.

8 views0 comments

Comments


Liked what you just read? Join our community to stay updated!

Thanks for submitting!

bottom of page