Yes, there is a difference between good debt and bad debt. In simplest words:
good debt – also referred to as leverage, can help you in building wealth and passive income. You can buy an asset such as rental property, finance it with a mortgage and grow your cash flow.
bad debt – is an inefficient way of using borrowed money. The key mistake here is that the amounts borrowed are used for financing day-to-day expenses or for purchasing items that decrease in value over time.
HOW BAD IS YOUR BAD DEBT?
Each situation is different but you can use the following guidelines to check any warning signs in your personal situation:
1. You are using more than one bad debt products – credit card, overdraft facility, cash loan, car loan etc.
2. You owe more than 50% on your credit cards
3. All your monthly bad debt payments sum up to more than 25% of your income
WHAT ARE THE KEY STAGES IN FIGHTING BAD DEBT?
Three typical stages lead to bad debt elimination:
ORGANIZE YOUR DEBT
You need to make a list of every loan product that you are currently using and describe it with the following details: total amount to be paid, monthly cost.
PRIORITIZE YOUR DEBT
As soon as you understand your debt, you need to decide which one you will pay down first. My suggestion is to attack the ones that are the smallest in total amount to be repaid. Using this method, you will see effects faster, and you will get more disposable income shortly.
ELIMINATE YOUR DEBT
Eliminating debt comes down to making extra payments against what you have borrowed. You need to take a good look at your budget and see where you can cut on expenses in order to use this extra money for fighting debt. You are also recommended to think about additional sources of income. Every dollar counts when it comes to fighting debt.
WHY IT IS IMPORTANT TO FOCUS ON BAD DEBT ELIMINATION?
Bad debt is not only costly but can lead to serious consequences in case of loss of income.
Bad debt is also slowing you down on your road to financial independence.
Bad debt, if not managed properly, will grow over time and lead to serious financial challenges.
One final thing I wanted to share. You need to become skilled at making, controlling and safeguarding your money. You need to start working on your financial IQ. This will help you to understand money, make money work for you instead of you working for money.