Tuesday, May 15, 2007

The Difference Between Good Debt and Bad Debt

More on debt. There is good debt and there is bad debt. Several readers emailed me again recently to ask for more on this. I will try to put it even more simply . . .

Good debt is debt that you do NOT have to pay back. Others pay it for you (mortgage on investment property).

Bad debt is is debt that you rack up and have to pay back yourself. Consumer debt such as credit cards and car payments.

There is a book I highly recommend. Entitled (ironically) Good Debt, Bad Debt: Knowing the Difference Can Save Your Financial Life, this book by real estate agent Jon Hanson is a great read. He does not do much brokerage these days, but travel quite a bit teaching people the benefits of money management, understanding good and bad debt, and most importantly, teaching young people about money in an environment where they are wooed by TV ads, text messages on their cell phones, and massive piles of junk mail telling them how easy it is to get a credit card.

Thursday, May 3, 2007

Pay Cash Or Leverage?

Overnight, I received a handful of emails from readers asking about debt. The consensus was that utilizing debt to purchase property (borrowing from a lender) isn't a hard-fast rule, its more a choice.

I would agree. The words I use with my clients are "comfort level." It all depends on your comfort level. There is nothing wrong with purchasing investment property TO HOLD by paying all cash -- if you can swing it. You will still have the benefits of income, appreciation, depreciation and expense deduction. You just won't be able to also leverage a lender's money, and you are tying up a large amount of personal capital.

One thing that amazes me in this ongoing discussion about debt taking place in our nation and around the water-cooler each day is how people will shudder at the thought of utilizing debt to purchase investment property. Yet they don't blink an eye at their consumer debt to buy pretty things that provide no income. And it is these impulse purchases on debt that is getting people into trouble, as they pile more and more charges onto their credit cards.

Still, while leveraging the bank's money to purchase investment property is a smart approach, it is a personal choice. It all comes down to each and every buyer's comfort level.

Wednesday, May 2, 2007

7x More Savings Than Cash

I heard an interesting statistic at a meeting recently. Someone examining the nation's savings rates looked at savings and debt statistics, and the Federal Reserve's estimates of how much cash is in circulation. The results are staggering.

It is now estimated that there is some seven times more money in savings than there is actual cash floating around. As everyone pretty much knows, there is no possible way the nation's banks can come up with cash to cover all savings withdrawls if they were made simultaneously. We operate on bookkeeping entries and debt. And with debt come a number of benefits.

In earlier posts I have talked about good debt and bad debt. In fact, there is a book by that name by an Ohio Author, Jon Hanson. His book, "Good Debt, Bad Debt" talks about the difference between destructive consumer debt, and debt that works for you.

Back to the original statement about savings and currency. So where is all that money in savings that is not covered by currency? It has in the form of debt . . . monies loaned for real estate purchases, most often. One of the best statements I ever read was from Robert Kiyosaki, who notes that real estate is the only investment for which the bank will give you eight dollars for every two dollars you put up first. Of course, its in the form of a loan. Still, THAT is where the money in savings has gone.

Anyone involved in business knows about the difference between savings and currency in the marketplace. But seven times? That high number surprised even me.