Warren Buffett On Debt

Good Debt Versus Bad Debt

Another reason why excessive debt can lead to bad results is the confusion between good debt and bad debt. As a rule of thumb, good debt is used to buy assets that generally appreciate in value and bad debt is used to purchase wasting assets that potentially require maintenance and upkeep: jet skis, plasma tvs. More specifically, Robert Kiyosaki, author of Rich Dad, Poor Dad states that good debt is used to purchase assets that put money in your pocket; rental property, dividend paying stocks, franchise businesses, and that bad debt is used to purchase toys or “doodads” that take money out of your pocket each month; jet skis, plasma tvs, cars, etc..

He goes so far as to say that a mortgage on your personal residence is bad debt since, alt

hough the house is appreciating in value, the house is taking money out of your pocket on a monthly basis through upkeep and maintenance, taxes and insurance.

In my opinion, this is a very conservative definition of bad debt. A mortgage on a house is relatively neutral and neither good debt nor bad debt. Although a personal residence creates monthly expenses, a) the house value is appreciating making it a wash on the monthly expenses and b) it is not financially prudent to rent over a lifetime.

An individual who rents for 50 years from the age of 25, paying an average monthly rent of $700 will end up paying $420,000 over a lifetime. If the rents increase at 4% a year, the renter will end up paying well over one million dollars in rent, $1,282,409 to be exact.

I don’t know about you but I can find “bearable” accommodations for half a million dollars.

Bad Debt Examples

• Automobiles
• Credit Cards
• School Loans

Good Debt Examples

• Rental Property
• Business

Neutral Debt

• Home Mortgage

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