The Debt Payoff Myth

There has been much written about how to payoff or eliminate your debt.

Most of the techniques recommended are OK but lack the true mechanics about how most people handle their finances.

The common theme is to gradually payoff each debt by paying a little extra each month onto the smallest debt obligation.

OR

To totally payoff everything immediately by re-financing your home mortgage to lower the overall monthly payments.

Neither of these are necessarily bad ideas except they do NOT take into account the lost “opportunity cost” or what to do with the excess income you have now once your monthly payments are lower. (It also does not take into account something I talked about in an earlier post, the tendency for most people to turn right around and create new debt outside of the mortgage so they end up in the same “hole/position” again.)

 One of the common misconceptions is that paying off ALL of your debt is good.

However, there is: Good debt AND Bad debt.

It would appear that ALL debt is bad debt BUT, this is far from true.

Most “consumer” debt IS bad debt and more than likely “should” be paid off.

When you borrow to invest in a business, is this bad debt?

This would be considered Good debt. (Of course, assuming this business is a good investment.)

From a cash flow perspective as long as the business can pay for the debt this works.

In other words, the business is at positive cash flow or showing a net profit when you include the debt payment as an expense.

Using debt to purchase investment real estate could also be considered good debt.

So, in conclusion, struggling to get out of debt may not be the best method for some people.

In a future post I will discuss the methods used to build wealth without paying off your debt. 

Advertisements

One Response to “The Debt Payoff Myth”

  1. thewarondebt Says:

    This is a good post! Looking forward to reading more.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: