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Tags: Debt | Good | Bad

All About Debt: The Good, the Bad and the Ugly

By    |   Friday, 16 March 2012 09:23 AM

The other day, a good friend sent me an article in which a "financial adviser" talked about good debt and bad debt.

Good debt, in their mind, was money spent on a college education, a house or a car (things you need).

Bad debt was credit-card debt (things you don’t need).

Let's examine that a bit more closely.

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I started with a small amount of money and have become financially independent. With all due respect to that author, let me "correct her."

Debt played a huge role in me becoming financially independent, so I am actually speaking from personal experience — unlike most pundits who have made little or no money with debt.

But debt, like firearms, should only be used by those who are competent and skilled enough to handle them.

I have a simple rule for handling debt. I borrowed money 14 years ago on via home equity at 6 percent. The stock I bought was paying a 9 percent dividend and I used the dividends to pay down the interest-only loan.

Because the dividend grew at an average pace of 9 percent annually, my loan was eventually paid off with the proceeds and the stock I bought then has increased in value almost 500 percent.

My rule is simple. I don't go into debt for anything but my primary residence unless it provides a positive cash flow from the start.

I am all for education, provided you can pay cash for it.

If you can't, there is no reason you can’t attend community college or get full-time jobs and go to school at night.

The total U.S. student-loan debt is now up to $870 billion, which is more than the national auto-loan debt or credit-card debt, according to an article from the Federal Reserve Bank of New York. Americans owe $693 billion in credit-card debt and $730 billion in auto loans.

And those student loans aren’t discharged in bankruptcy.

Many parents will never achieve their dream of retirement because they will go into debt, "paying" for their children's education.

It’s their choice. I'm not judging them; I’m just making an educated observation.

Most people will never get ahead today because they are saddled from debt from cars, houses, student loans and other credit cards.

None of these expenditures produce income. And cars and houses require even more spending once they are purchased.

Once you buy a stock that pays you dividends, you don’t have to buy anything. In fact, you will receive a check every three months that should increase every year.

By reinvesting that money, you can become wealthy.

Want proof? In the 1930s, Grace Groner bought three shares in Abbott costing $60 each. She was thinking ahead. She never sold the shares, which split many times over the years and paid dividends that she reinvested. At her death, that $180 was worth $7 million.

Now, if I had children and grandchildren, I might share this article with them.

But my daughter already knows this.

When she was 9, she asked me: "Daddy, are we rich?"

I said, “Honey, we do not have a big house and Daddy drives an old Jeep. How can we be rich?”

She said, "Dad, I’m not dumb. Everyone knows if you spend all your money on your house and car, you will not have enough money to invest and become rich."

Just think: I didn't have to spend $150,000 to "educate her" about good debt and bad debt.

About the Author: Bill Spetrino

Bill Spetrino is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of the Dividend Machine. Discover more by Clicking Here Now.

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Friday, 16 March 2012 09:23 AM
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