The word debt is often linked to the idea of loan. With that relationship in mind, we’ll discuss the differences.

Today, we hear “Debt is bad. Get out of debt. Pay off your mortgage. Debt free is the way to go. A debt free life is imperative to financial freedom.” I think people have really freaked out about this topic.

But do you remember back in the day when we used to hear that fat and cholesterol are bad? You would find people in the grocery store looking at the labels to make sure they were not in the food they were buying. Then when we received information that there are good fats and good cholesterol, people’s heads were spinning.

The same applies to debt. There are two types of it: Good Debt and Bad Debt. Plain and simple: when people use debt to buy assets (things that produce income for you), that’s good. On the other hand, when people use debt to buy junk and liabilities, that’s bad. Can you guess what the rich do?

Good debt is used to produce, while bad debt is used to consume.

The good

It’s good when it can help increase your productivity and wealth. If you go into debt to buy assets like real estate and use it to generate cash flow, then you are using it to your advantage. The lessee of the property is actually paying for the liability.

At the time of writing this article, my wife and I have just signed up for a training program taught by Bob Proctor. So far, it has been our most expensive training program. While we could use money from our emergency fund, we decided it’s best to keep our reserves intact. Our next option was to use some of our cash value from our life insurance policies. But we feel that when an investment opportunity arises, it’s easier to borrow from our policies.

The option we finally made was to charge it to our American Express Blue Cash Credit Card. While this may embarrass some of you, it made more sense for us to take advantage of someone else’s money. This money is used to invest in us, where the potential benefits are limitless.

Rest assured, we have a strategy to return it.

The bad

It is bad when you use it to consume. (Bad is a relative term in the sense that it is not used to increase your wealth.) Some use credit cards to finance a lavish lifestyle and go deeper and deeper into the hole.

I recently read that the average household with a credit card owes almost $10,000 on their cards. If these balances are the result of destructive consumption, then these households are in trouble.

Credit card companies like college students. They charge a lot and often pay the minimum because they have virtually no income to make up for it. But I’m sure the students love them too. They usually offer free stuff.

The ugly one

Let’s look at the example of the average household that has credit card debt of almost $10,000.

Amount – $10,000
Payment – $200 per month
Term – 78 months
Total Interest – $5,790.32
Grand Total – $15,790.32

With a monthly payment of $200, it will take 6.5 years to pay off that $10,000. What’s worse, the interest paid is more than half of the principal. Now how ugly is that?

The truth

In truth, debt is not what everyone thinks it is. According to accounting, debt is when your liabilities exceed your assets. When your assets exceed your liabilities, that’s called equity.

Popular financial experts like Suze Orman and Dave Ramsey recommend eliminating all debt. They say avoid it. And I agree, because of the true meaning: liabilities > assets = debt. But this is not the definition they are using. His position is that any type of loan is bad. But as we’ve discussed above, if you borrow to produce more, then it’s good.

To put debt (or indebtedness) on your side, here’s the formula:

Increase your liabilities to increase your assets to increase your wealth.

Debt can hurt you if used incorrectly and irresponsibly. But we are using debt differently. We are using it to increase our productivity and wealth. Use it only in your favor.

If you can accept that there are good fats and good cholesterol, consider that there is good debt. Do you have debt weighing you down or debt helping you stay financially fit?