Anyone who has read 'Rich Dad, Poor Dad' knows that good debt is defined by Robert Kiyosaki as debt that someone else is paying for you (a mortgage on a rented buy-to-let property for example) and bad debt is debt that you are paying for yourself.

Mary Hunt, in her excellent book 'Debt Free Living' has a slightly different slant on it, which adds to the above definition, I think.

She says that good debt is debt that is secured on something of value thus decreasing the risk for both lender and borrower. Ideally secured on something that will increase in value, not decrease. So in the event that you were ever unable to repay the debt, you would have something to sell, something of more value than the debt.

For Mary, bad debt is consumer debt, where you incur debt to pay for a depreciating item, something that may not even last three years before becoming obsolete, and where there is risk for both borrower and lender because the debt is unsecured.

She sums it up brilliantly by saying

'Spending money you don't have yet, to pay for things you (often) don't have anymore, is anything but intelligent. Nevertheless, that is what millions of people in the country are doing every day, every month, year after year'.

As someone who is probably still paying for a hi-fi I bought in the 1970's, due to what is called revolving credit (where you take out more debt to pay off old debt, albeit it at better interest rates or even 0% interest, I have to put my hands up and say 'I'm no angel here'. But I have learned, oh, how I have learned. I would now no more incur any further consumer debt than run down Worthing High St wearing nothing but a bikini made from Egg Cards.

Half of my clients are struggling with some kind of debt and the other half are generally debt free but so scared of incurring any debt at all that they are unable to move forward. They never get the power of leverage / gearing (other people's money) working for them.

I had the surreal experience of hosting a teleclass on this module recently to three people who gaily informed me at the start of the class that they didn't have any debt at all. I was a bit flummoxed at that point. As we explored the topic of incurring debt to leverage your wealth creation and making sure that other people pay any debt for you ('good debt' in other words) I felt a little like the snake tempting Adam and Eve!

On my personal finances, I am tempted to pay off all my outstanding debt when we sell our house. Then I wonder if I might not be better to buy an asset with the money, that will generate an income for life, and use the income generated to pay off the debt first and then afterward, put money in my pocket. A much more attractive idea, especially if the asset in question is a house in Greece!

I console myself with the thought that most of my debt nowadays is good debt and the saying that 'if you have half a million pounds worth of debt, then you are halfway to being a millionaire!'

 

© Nicola Caincross of The Money Gym 2008. No content to be reproduced without written approval of the author.

Nicola is a Wealth Coach, Author, Publisher and Speaker, and the Director of The Money Gym.

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