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Investing for Retirement Means You Must Understand the 3 Types of Debt

HeroicInvesting.comToo often the word “debt” causes your heart rate to increase from sudden phantom stress, a Pavlovian reaction to be sure, but the truth is that all debt is not created equal and all debt is certainly not bad. Here are the three kinds of debt you should be aware of while you make your investing for retirement plans.

1. Bad Debt
Bad debt is generally defined by companies that lend money as a debt that is unlikely to be repaid. This could be due to the liquidation of a business, the inability of the borrower to pay back the loan, or a result of pending bankruptcy. But that is not what we mean by the term “bad debt.” To you, the borrower, bad debt is debt that you incur over the appearances of wealth. When you use credit to buy clothes, cars, vacations, plasma TVs, etc., you are borrowing money in order to acquire things that depreciate in value and that that you can’t rent out. This is the kind of debt that creates a drain on your resources.

2. Good Debt
Not all debt is bad. In fact, some debt is actually necessary and in some cases desirable. Any debt that helps you generate a positive cash flow or that is designed to pay for a commodity that will increase in value over the years is commonly termed “good debt.” When you buy (or lease) a car, van or truck on credit and use that vehicle to generate income with your business, that is good debt. (Of course, if you need a $30,000 vehicle and you opt to buy the $90,000 version, that’s not an example of what many would call “good” debt!) Another common example of good debt is the house that you bought and live in. Over time, you pay off your mortgage and when you retire, you have a valuable asset without the monthly expense of a mortgage.

3. Great Debt
Debt is our inflation protection policy. It’s our insurance policy against inflation. That leverage can be used to create a lot of wealth for us. In fact, without “great debt” it is virtually impossible as an investor to create the kind of wealth that will allow you to retire in comfort. That being said, investing in tenant financed real estate, when done correctly, is the absolute best form of debt known to mankind and will result in extraordinary wealth while significantly reducing your risk. You only invest a small portion of the cost of the properties and yet you reap all the benefits.

It’s difficult to even begin properly investing for retirement until you understand the different types of debt. We like this saying, which goes along with concept of Great Debt:

“If you owe the bank a hundred dollars, that’s your problem. If you owe the bank a hundred million dollars, that’s the bank’s problem.”

Got a question about debt? Please post it below and we’ll have one of our expert financial counselors answer it.

The Heroic Investing Team

HeroicInvesting.com

 

 

 

 

 

Flickr / Familien Hostvedt Nymoen

 

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