There is a difference in the type of debt you hold, and although it would be great to be wealthy and debt-free you should remember that debt is also a tool to make you wealthy.  The wealthy use debt to leverage and purchase stock or investment properties; basically, spending this debt on any appreciating asset that can give them a higher rate of return, and in most cases a tax write-off from the interest on the borrowed funds.

Most Americans feel that debt is a “bad thing,” and many feel quite nervous or insecure when thinking about going into debt to make money.  However, the vast majority do just that.  We use debt for home and auto financing, home improvements and education.  Debt that advances a person’s ability to purchase assets such as homes, vehicles, or investments; or is used to increase their income through business or education are all good debts.  Many advisors would agree that these expenses are inherently appropriate today, and it is important for us to focus on what these borrowed funds will allow the household to achieve and if they will enhance wealth in the long run.

Bad debts are loans that do not advance wealth or income prospects but instead provide enjoyment and an increased standard of living that cannot be supported by earnings alone.  This would include things like balances on unsecured lines of credit, credit cards, or personal and consolidation loans.  Some borrowers create a habit of using credit to fill-in the gaps in their earnings, believing that they cannot survive on their income alone and need the credit to increase their standard of living.  This type of borrower, whether old or young, has the greatest risk today.  They sometimes feel that they just can’t earn enough for their lifestyle, but in reality, they are just living above their means, unwilling to sacrifice more and get out of their comfort zone to make changes to better their situation.  This habit must be broken to ensure you do not become a chronic borrower with a lifetime of debt.

Christine’s Tip:

If you are subsidizing your income every month with debt, try establishing a new financial plan to make the necessary changes you know you must do to live on a budget.  Devise a strategy to put your debts in order to create a stable financial future.   You should always have a strategy to repay each debt in full during the life of the asset or at least by retirement.  Always be planning.  You can’t expect to have a future if you don’t plan to have one.