Leveraging your financial future begins with making wise decisions that are not based upon emotion or bias. If a decision could get you into some trouble, it’d be considered by many to be a bad decision. But what if you never allow yourself to be in a situation where a decision is required? Reward doesn’t exist without risk, and if you don’t take any risk, then it is likely that you won’t be rewarded. Practical financial behavior starts with organizing your priorities. If your priorities are aligned, your future will be much more promising than if they are not. Planning your future with consideration for interest and inflation rates is far more crucial than upgrading to the latest phone annually or buying a new car just to keep up with your neighbor.
Debt is quite easily one of the most widely misunderstood concepts in the world of finance. Generally speaking, debt is considered good for a company but bad for an individual… Why is this? Well, when an individual takes on debt, they are generally paying a price on the debt. This price comes in the form of interest. Along with this, debt can put you in a position to pay more than the actual cost of an item, or even encourage you to spend more than you can afford. When a corporation takes on debt, it allows the business to leverage a small amount of money into a much larger sum over time. This can help corporations grow, and expand their projects more quickly (theoretically increasing profits at an accelerated rate).
This fundamental difference in debt strategy can be changed by thinking of yourself as your own business. Wealthy people frequently ask themselves: “How can I turn this into a source of income.” Instead of adopting the mindset that someone else has to pay us, we should be thinking of ways in which we can pay ourselves. When considering expenses or financing, cash flow is essential. It’s important to avoid purchasing depreciating assets that won’t generate income. Debt can be good or bad, depending on how it is used. For example, depreciating assets typically fall in the class of bad debt, or debt that doesn’t create a long-term benefit. Examples of bad debt include vehicle loans, high-interest credit cards (especially if not paid off monthly), and personal loans used for non-essential purchases.
- Vehicle loans may carry high interest rates, and depending on the make and model of the vehicle, the value may depreciate faster than you anticipated.
- Taking on debt for expenses like a vacation or material goods can prove to be an expensive habit. More particularly, an expensive habit that will likely not earn you any money.
Debt can be a burden, but it has a more positive impact when used to generate future income or support business operations. Debt used to build wealth, or generate future income is considered good debt. Some examples of good debt include student loans, mortgage loans, and business loans. Attending college can help people secure better-paying jobs, though it often comes at a cost. This cost is generally manageable if you determine that the investment in yourself has been worthwhile.
- Student loans typically carry lower interest rates, so financing this debt may not have a large negative impact on your financial frame.
- Student loans are also considered installment loans, which can help improve your credit mix.
- Real estate is typically considered to be an attractive investment. Buying a house usually means that you will have to take out a mortgage loan. If your home appreciates in value, then your investment was likely worth it.
- If you live in a bad neighborhood and/or you don’t keep up with home renovations, it may be harder for you to increase the value of your home over time.
- A business loan may be good for you because it can allow you to expand or even open up the business that you may have been planning for.
We should be looking at debt as a tool to generate future cash flow; not only as a means to buy new consumer goods. But be careful, as good debt can turn into bad debt if not managed responsibly. With the new age of big tech, we are witnessing a generation that is easily influenced by flashy advertisements, and the impulsive urge to buy consumer goods. Though at the same time, we are witnessing a generation being burdened by unhealthy rates of inflation and rising costs of basic household necessities. The key to financial health should be to prioritize good spending habits, particularly those that avoid accumulating large sums of bad debt.
