June 23, 2017 3 min to read

What is Debt?

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Today, almost everyone is in debt (just ask Donald Trump). In January of 2016, the US gross national debt was $18.96 trillion. Regardless of national or individual debt, most consumers don’t fully understand how borrowing works, nor do they know the differences between types of debt. This article serves to educate clients on the two main forms; Healthy and Toxic.

 

HEALTHY DEBT

Healthy debt is debt used as a tool to create cash flow and eventually, expand one’s net worth. Simply put, it’s an investment. For something to be considered healthy debt, it needs to meet three requirements: low cost, tax deductible, and creates savings/cash flow. Let’s explore some examples.

Real EstateRight now, real estate rates and out-of-pocket costs to purchase property are at record lows, interest payments are tax deductible, ownership increases net worth, and it can create cash flow via rental income.

Student LoansStudent loan interest payments are also tax deductible and have low interest rates. Plus, they increase cash flow by helping the borrower get educated in their field, so they can increase their income.

BusinessesA type of debt that typically doesn’t come to mind when you hear “healthy debt” is Business Debt. Small businesses get huge tax breaks, create cash flow for the proprietor, and typically, can be acquired at low rates. Building your own business is one of the most lucrative ways to expand your net worth. Now that we have defined what a Healthy Debt looks like, let’s explore Toxic Debt.

 

TOXIC DEBT

Toxic Debt is the opposite of Healthy Debt. These liabilities carry high interest rates and kill cash flow, via minimum payments. Toxic debt has many forms. Listed below are the ones most utilized by consumers.

Credit CardsCredit cards are the most popular type of toxic debt. Credit cards carry very high interest rates and most companies compound the interest DAILY, on top of annual fees. When used incorrectly, credit cards hurt one’s cash flow, which ultimately diminishes net worth. According to NerdWallet, the average household carries $16,748 in credit card debt, typically costing the card holder an additional $1,300 in interest annually.

Payday/Title LoansInterestingly, the only debt more toxic than credit cards are payday loans/title loans. These types of loans can be predatory and carry unreasonable interest rate/payback terms. It’s best to avoid these altogether.

Car LeasesCar leases are also considered toxic, unless used for business purposes.

 

If one of your financial goals is to balance your debts, the first step you should take with your consultant is to categorize your debt and create a toxic debt spend-down strategy. Inside this strategy, you should explore transforming toxic liabilities into healthy ones by consolidating/refinancing.

 

Our Consultants specialize in toxic debt spend-down and building healthy balance sheets. If you would like to inquire about these services, please email us at info@greenlotuspg.com.

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