Debt: The Good, the Bad and the Ugly

Borrowing can be a useful way to help and spread out the cost of
large purchases or expenses that we could perhaps not otherwise
afford. It can also help us through difficult times or periods when
the cash flows just don't add up, but be careful, far too many of us
let our dept get out of hand.It is almost impossible to live totally
debt-free; we all run into some financial challenges at some point in
our lives. No matter how good you may be at managing your money, there
will come a time that you may need to consider borrowing. Borrowing
can be a useful way to help spread out the cost of large purchases or
expenses that we could perhaps not otherwise afford. It can also help
us through difficult times or period when the cash flows just don't
add up. But, be careful. Far too many of us let our debt get out of
hand. Here are some good debt, bad debts and the ugly debt you all
have to look into.GOOD DEBTGood debt is the kind of borrowing where
you finance or purchase something that appreciate or gains in value.
such debt includes borrowing for things that you need but can't afford
to pay for up front without depleting your cash reserves or
liquidating investments. Good debt is investment debt that greats
value. Examples of good debts are:Borrowing for a homeBorrowing to buy
a home with a mortgage usually makes good sense provided you are able
to comfortably handle the monthly payment over what may be a
considerable period of time. Usually the value of the property, if in
the right location will grow and more than make up for the financing
charges that you might have undergone.Bear in mind that you do not
usually need to pay down your mortgage too quickly especially where
you have other debt, as mortgage loans ten to have lower interest
rates than other forms of debts.Borrowing to investYou may decide to
borrow if there are ways to make your money work harder for you. if
interest rates are low, and you are able to get a higher return from
investing your money than what you'll pay in interest on a loan, then
it should be wise to borrow. Borrowing to invest in good quality
assets that grow in value can build's one's wealth
substantially.Borrowing to invest can have numerous benefits but there
are also accompanying risks so it is certainly not for everyone. In
general, it is a strategy best suited for investors who have excess
cash or have a greater than average tolerance for riskBorrowing to
finance an educationHigher education comes with full financial value
and usually increases earnings potential thus making a difference to
one's future. Students loan are common place in more developed markets
as it is expected that once the students have completed their studies,
they will enjoy significant benefits including greater economic
stability and security, more prestigious employment, greater job
satisfaction, and independence.Borrowing for a businessMany growing
business ventures have very uneven cash flows which makes it difficult
for them to run their operations efficiently without some credit line
in place. Others need to borrow to expand their facilities or to take
advantage of short term opportunities.Other forms of debt financing
include vehicle and asset financing which should be considered
especially for big ticket items such as computers, generators, and
motor vehicles.BAD DEBTBorrowing for pleasureBad debt is where you
borrow to finance lifestyle purchase often to impress friends, such as
cloths, jewelry's, expensive holidays and cars or jus to have a good
time; these are things that should ideally be paid for in cash. Once
the vacation is over, you're left with the wonderful memories and
photographs but a rising debt burden.Try not to buy things you consume
quickly or what will quickly depreciate or lose value. Using credit
responsibly can help us grow our wealth. The problem is many people
get carried away and are tempted to take out loans just for sheer
consumption. If not carefully managed, this can spell disaster. Credit
card debt is often considered to be bad since it usually carries the
highest interest rates.UGLY DEBTHistorically some of the most
devastating debt has come from people borrowing to invest. The worst
case scenario comes where the cost of borrowing is climbing while
investment values are falling. This situation can be nerve- wrecking
for even the most savvy investors.Buying stocks on "margin" or margin
trading is where one borrows money to buy stocks. Leverage comes with
significant risk so you should have an idea of how much risk you are
prepared to take. Remember the greater the risk, the greater the
reward.Much financial pain results as a bull market gathers momentum
and share prices are skyrocketing. Then, investors particularly the
inexperience, uninformed "bandwagon" investors, with little or no
understanding of how market work are enticed into making margin loans
with promises of inevitable and imminent prosperity.Unfortunately,
most people listen to the "get rich quick" exciting part and ignore
what happens when the market starts its inevitable bearish downturn.
In the falling market if panic sets in and investments are being sold
at a loss, the investor must still cover the difference between the
outstanding loan and the investment proceeds out of their own pocket.
If cash isn't available and the loan has been secured using home as
collateral, then things can get really ugly.