A few simple ideas, when understood fully, lead people down the road to financial independence and wealth. You need to understand the difference between an asset and a liability. You need to understand the difference between earned income and passive income. You need to understand three basic cash flow patterns. Finally, you need to understand how your focus in life ties it all together.
Most people do not know the difference between good debt versus bad debt. Most people think all debt is bad, and they spend a great deal of time trying to eliminate all of their debts. most people do not realize that good debt exists.
Bad debt is debt that makes you poor. Bad debts are expenses or liabilities that do not put any money in your pocket each month. Bad debt is, in every case we could think of, consumer debt. Most of the items you would consider putting on your credit card would fall into this catagory. Good debt, when understood and managed properly, is debt that makes you wealthy. Wealthy people have debt, and are not afraid of using debt. The difference is, it is usually some form of good debt. These debts are expenses associated with a successfully managed business or real estate investment, or liabilities associated with aquiring a cash-flowing business or piece of real estate. Even though the debt from a real estate purchase will always be listed as a liability, if the cash flow from the property exceedes all expenses and produces a profit, than the property as a whole must be considered an asset. In other words, bad debt is always a liability, while good debt is debt associated with assets. Examples of good debt...it is important to note that the success of each investment depends on the proper management of each investment.
You owe $700,000 on mortgage to an apartment complex that brings you $4000 profit every month after paying the mortgage and expenses
You take out a home equity loan to start a business or purchase rental property
You take out a home equity loan to remodel your home, which happens to have a lot of room for appreciation in this market
You take out a loan to purchase a new vehicle to further your snow plowing business
You decide to start a home business and you borrow money from several relatives, putting the agreements into writingExamples of bad debt
You just got your promotion, so you buy a motor cycle with a $300/mo payment financed by the dealership
You buy $200 worth of clothing at the mall on your credit card
Many of the above examples could be either good debt or bad debt, depending on the knowledge and experience of the person responsible for the debt. Many people believe if they start a business, their financial problems will be gone. What happens in reality is their personal financial situation becomes the company's financial situation. A persons lack of financial ability is transferred into the company. This goes to the idea that money will not make you rich, it is really your knowledge from research and experience that make you rich when you finally decide to make an investment. Learning the difference between good debt and bad debt, and how to manage both, will make the largest difference in your long term financial situation. In the end, you get out of it what you put into it...so invest some time to increase your knowledge everyday and you will find yourself on the road to wealth.
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