Pay off all debt, How to get started...

You have to pay off all debt, FALSE
Everyone agrees there is not such things as good debt, FALSE.
You have to pay off all debt before investing, FALSE
Paying off debt is a guaranteed return on investment, TRUE

In general if you have debt where the interest rate is over 5-6%, pay it off. Stop buying Lakers tickets and imported beer and focus on paying off that bad debt. If your not sure whether it is good debt or bad debt, its bad debt so just pay it off. 

If you were not aware there is such a thing as good debt, you probably don't have any good debt. One example of good debt: a mortgage on one of my rentals, is 4.75%, with a 30 year term. The mortgage is fully paid each month by my renters, the interest expense is deductible, inflations has recently been >2% and it averages about 3% rent increase per year. In this situation I like this debt, so I don't chose repay it early. I could make extra payments on this debt with the income from this property or income from another passive source, but then than money would be gone and I couldn't invest that money and make ~11% probably making right now.

Examples debt:
Buy a rental with debt: GOOD
Credit cards > 6%: BAD
Buying your home: (It depends on your: home, market, economy, timing, etc...)
Buying your home and you rent out spare rooms: GOOD
Buying your home, it a fixer upper, you do all the work, while living there, and you rent out rooms: GOOD
Buying stocks on margin: (It depends)
College loans < 5%: GOOD
College loans > 6%: BAD

If you want to keep going, the next step is building a small emergency fund.  If you liked this article check out the "How to get started" series for more.

No comments:

Post a Comment

Popular Posts