Mo Money's Building Wealth Blog

The term “debt” seems to always seems to come with negative connotations.  But is all debt bad?  Well, not necessarily.

Most financial professionals qualify debt in two ways – Unproductive and Productive.

Unproductive Debt – debt that is incurred to purchase something that doesn’t generate income or build wealth.  Examples:

• Financing a vehicle for personal use.
• Financing an education that is NOT relevant to your career or that your career earnings CANNOT support.
• Financing wants such as a vacation or designer clothing.

Productive Debt – debt that is incurred to support an investment that will generate income or build wealth and is in many cases tax deductible.

• Financing a vehicle for business use.
• Financing an education that IS relevant to your career AND that your career earnings can’t support.
• Financing your primary home or investment properties.
• Financing a business purchase.

Following these definitions, I can see two large booby traps that prevent most people from accumulating wealth and they both arise from taking on far too much Unproductive Debt whereas they become financial burdens. 

Trap #1 – For many young people today student loans are crippling them financially.  This is such a problem that the US government has taken steps to help relieve some of the burden.  Whether you agree or disagree, one thing for certain is the problem exists, and more often than not due to bad choices having been made along the way.  Tip:  Consider taking the first two undergraduate years at a super affordable local community college while you hone in on a major, then spend the following two at a reasonably priced state school.

Trap #2 – Personal autos are a depreciating asset.  They are NOT investments.  Unless you have deep pockets, consistently buying or leasing new cars is a huge waste of money especially when you consider the accompanying sales tax, property tax, and insurance.  With the average car payment in excess of $500 we’re talking a sizeable amount per year.  The problem is that people spend more money trying to look rich than actually trying to get rich.  If you find yourself cash strapped or without an emergency or retirement fund in place, then reducing your auto expense is the first place you should look.  Tip:  Spend no more than 10-15% of your monthly take-home pay on a car payment.  Ideally, buy a reliable brand or model and pay in cash, and buy it used after the largest amount of depreciation has occurred.  There’s nothing like having a zero-car payment.

So, the bottom-line concerning debt is that not all debt is bad.  The takeaway here is that the more Productive your debt is the better chance you have in building wealth. This is why business owners are amongst the most wealthy people out there. They have learned to exploit Productive debt and take advantage of all the tax codes that support business and capital growth.