Tackle All Bad Debt

You can think of financial freedom like a video game. You’ve got to get through 7 Levels to make it into Financial Freedom. First, let’s differentiate what makes debt bad or good.

Good Debt is debt that helps you, now or potentially, produce more. Student debt, apparently, will help you create more income on your career, therefore it’s considered good debt. Corporate borrowing that helps you grow the business is good debt. Even mortgage is considered good debt because it stabilizes your second biggest expense, the mortgage and lets you have a property asset. Most all good debt includes favorable treatment in the tax code (meaning that the interest on the fantastic debt is generally tax-deductible). So what is bad debt?

Bad Debt typically stems out of ingestion. It’s credit card debt. It is auto-loan debt. This debt is not helping you produce more; it’s all ingestion based. If you are not building to generate more income or possible capital appreciation, then it’s bad debt. And, typically terrible debt has no preferred tax treatment (it’s not tax deductible).

The most essential facet of Level I of this game to acquire financial freedom has three chief lessons to learn. One is to be able to budget. You’ve got to be able to create a budget and stick to it. If you can not do that, it’s difficult to get ahead in different areas of the game. Two is that you pay yourself. Too many times, when some spending goes over in the budget, everyone else gets paid. The store has paid, the rent gets paid, the credit card gets compensated, but somehow you don’t have money to pay yourself. Learning to pay yourself first, before you pay rent or anything else, is a vital life lesson to learn at Level I. Three, the last lesson to learn is to have the ability to generate more than you eat. You can do that by either restricting spending or producing more income. It’s with the excess production capacity you’ll be paying off all your bad debt.

I’d say you’re generally ahead of the game if you can find all of your bad debt paid off in your 20’s. It is hard because your big producing years are not coming until the 40’s and 50’s. But if you understand the three significant lessons of Level I while you’re not making a ton, then that will help you all the more when you’re on Level II and beyond.