Good Debt vs Bad Debt: What You Need to Know Before You B

SPEAKER_01 0:00

We see it as financial coaches. We see the decisions people make when they're investing their time for the money. Money is a tool and it's almost the only physical manifestation of time. When you pull out a$20 bill, that's an hour for minimum wage workers. How do you choose to burn through or spin that$20 bill? The choice is yours, as they say. But those simple choices is what's going to categorize the good debt versus the bad debt. Money is unmind. Yes. This is your boy Darren Harvey, and I'm joined by co-host Maurice Shabazz, and this is Financial State of Minds. This is a show where we help you get to that bag, manage that bag, and grow that bag as best as possible as we discuss financial and business literacy and anything, everything to do with the power of the dollar. And this show is being streamed right now on KGPC 96.9 FM and on KGPC969.org and available on all of your favorite streaming platforms of choice. And today's topic is going to be good debt versus bad debt. What is it? Which why is there good debt? Why is there bad debt? We're gonna break that down for you today. Uh topic created by Shabazz. Thank you, brother. So I'm gonna let you lead. So good debt versus bad debt.

SPEAKER_00 1:46

Yeah, man, I appreciate that, man. So yeah, man, a lot of times, generally, when people think about debt, there's usually not a lot of positive aspects that people generally think about when it comes to debt. And they think that debt generally is a bad thing, right? Right. But the thing is about debt is that there's two different types of debt. There's debt that makes you money. So you have debt that makes you money, you have debt that costs you money, right? So it's uh it's a big difference.

SPEAKER_01 2:21

Right.

SPEAKER_00 2:21

So, you know, when we talk about some of the things that could be considered as bad debt versus good debt, there's a very fine line to what is categorized as bad debt and what's categorized as uh good debt. I'm gonna let you go ahead, man. Why don't you talk about some of the good aspects of what would you consider good debt?

SPEAKER_01 2:45

Yeah, so pretty much aligning with what you said, good debt, well, I'll preface by saying this. The ultimate goal is to have no debt, right? Period. Just like at the end of the day. But listen, when you hear the term good debt and bad debt, it's like Shabazz said, if you're gonna have debt, the good debt is the debt that's helping you in some way gain money or accumulate wealth. So what is that exactly, Darren? Give us some examples. So the most basic one is investing in yourself, as we always talk about. So maybe you got some student loan debt. I would put that in the bucket as good debt because you gain some skills, or hopefully, the education help you gain skills to get a career that would have paid you higher than a career that did not require the degree. Statistically, it's proven time and time again. People who have even a bachelor's degree on average make more money than people who do not have a bachelor's degree and have just a high school degree. So that I would put that in the category in the good debt. When it comes to the big one, the most obvious one people think of a good debt is a mortgage, your house. Whether that's your primary residence, whether you're using that for rental properties or house flipping or any type of real estate investing, that is also a form of good debt. So real estate as a whole, good debt. Another one, too, I would actually categorize is business debt. So if you have business debt, especially if it's a business where it's profitable or at least revenuing a healthy amount of money, that is going to be in the bucket of good debt. Because again, all these things are making you more money and it's an asset that is most likely appreciating in value. So those are the good debts off the top of your head, for example. Bad debts, everything else. Pretty much everything else. If it's not some type of investing into yourself or into the market or making you money, it's a bad debt. So that includes pretty much anything that goes into a credit card that doesn't fall in those categories. So your Jordans, you're going out to the club, your contour experiences, that bottle of yak that you just bought. Like it is bad debt if it goes on your credit card. What other thing is a bad debt? Oh, yeah, your car. So your car, generally speaking, is bad debt because unless you get a very special type of car enthusiastic, I hear you guys, it's a car that's going to depreciate in value, right? Most likely. So that is a bad debt. The exception to that rule, also, too, is maybe you got a car and it's used for work. So if you're an Uber driver, you're a DoorDasher, you're in construction, you have a truck like that, or you're in the trucking services, that's gonna go in your good debt because, again, it's helping you make money. Or it's a tool to help you make money, that's a valuable asset going back to the business category of good debts. But if it's not, just for that. If it's just your personal vehicle, it's a bad debt. You want to get that paid off ASAP. Another thing where I would consider, I kind of put it in the gray area, Shibass. Oh, let me ask you this question as a fellow financial coach. Where would you put medical debt? Would you put that in a good debt, bad debt, or maybe there's a neutral area for that?

SPEAKER_00 5:54

Medical debt, I know some people probably would challenge me on this, especially some women who basically invest in cosmetic surgery. They feel like that's an investment that actually pays them for some people. But if we technically want to look at it, it's not an appreciating asset. It doesn't appreciate it. It's just a dead debt, you know. So medical debt doesn't give you a return, it doesn't help you build wealth. Um, so yeah, I would categorize medical as a bad debt always. Got you, got you.

SPEAKER_01 6:29

Okay, so a 20-year veteran cab says bad debt. So sorry guys, I'm overruled. I can understand in certain circumstances, I would put it maybe gray area, you need to have good health so you can make good money. But I pretty much agree with you. Generally speaking, in most cases, it's gonna be a bad debt.

SPEAKER_00 6:46

So But you to your point, you actually got a point. Like, you know, I mean, health is wealth if it's something that's going to help you live longer versus you know, you living you dying, like let's say you have some kind of ailment or illness that basically you would die in a year and by you getting the surgery or whatever it was, it and you would live for the next 10 or 20 years, then I mean, you probably will look at that as a good debt, like, okay, this saved my life, right? Right. So, I mean, if you look at it that way, I mean, because of course once you did, you definitely can't accumulate no wealth at that point. Right. So, yeah, so I mean, to that point, then that could be debatable.

SPEAKER_01 7:26

Yeah, so that's why I challenge it. Or I'll just say this, listeners, if perhaps if you're sitting down with either one of us and that's the reason why you're in debt, and that's the only reason, no one's gonna be yelling at you and shaking their head in shame, you know, in front of your face or behind your face for that reason. We get it. Medical things come up. So, as far as bad debt, we talked about cars, we talked about pretty much any depreciating assets that would go into a credit card, and we talked about medical. Is there any other bad forms of debt that you can think of off the top of your head?

SPEAKER_00 7:57

High interest credit cards. Yeah. Depending on how you use them, of course. If you're the type that pays off your balance every time the statement comes out, then you're not really paying any interest. But if you're the type of person that basically leaves a balance to pay off when it comes to credit card debt, then yeah, that is a bad debt. Got you.

SPEAKER_01 8:20

And I would also say this too: if you need to borrow money, I'll say in both ends, whether you're the borrower or the lender. So if you've borrowed money from personally from a friend or a family member or a smaller institution, that's a bad debt. Like, so if you have money borrowed from a loan shark or a firm, buy now, pay letter, I would generally put that in the bad debt category. Whether you're the borrower, meaning that you borrowed the money and you got to pay somebody back, or you're the lender and stuff like that, people owe you money. I would say personal loans for the most part, again, unless there's always exceptions, but generally speaking, that would be a bad debt. So I think we did a pretty intensive list of good versus bad debts. What are they? So, Shabazz, why do you think people get into having bad debt, especially a lot of bad debt, thousands of dollars, tens of thousands of dollars, even hundreds of thousands of dollars? Why do you think that happens to be the average person?

SPEAKER_00 9:20

Usually people are living above their means. They want to live a certain type of lifestyle. Um, they feel that they're entitled to it, they deserve this way of living. And in most cases, they're financing it. They can't afford it, so they're financing it. So you're financing this lifestyle where you want to have this luxury car, you want to, you want to have this luxury apartment and all these other things. You want to go on trips, you want to go on vacations, and you're fine, and people are financing all these things. And what happens is that all it does is keep them on a hamster wheel of basically making money to just hand it off to somebody else. Right. It's not coming back to them, you know? And that's something to think about. And this is the thing about cash. I mean, it's good to have liquid, of course, but the one thing that they never really told you about having liquid is that liquid is taxable. It's probably it's the largest form of taxation that you can get on actual cash, right? So what we gotta understand is that debt, good debt, that is, can be leveraged, right? I'm gonna give you a perfect example. If you own your house outright, and let's say you don't owe a mortgage and you sell that house, right? And let's say you sell it for a million dollars, right? After closing costs and stuff like that, let's say maybe you have about 900,000 or so. Now what happens is being that you didn't invest that money, pretty much is taxable, right? Where's say you leverage that property and you use that property to acquire another property, right? Right? And um, and some would call it a 1031 exchange, there's different ways to do it, right? Then guess what? It's not taxable. So that's the thing, and the wealthy know this very well, they leverage debt, they're very good at managing good debt, and that's the key. And I think it's not so much of hey, debt is bad, any kind of debt that you don't want and stuff like that. No. You can actually leverage debt. And if you ask some of the millionaires and billionaires, I heard they've said they rather had debt than anything, good debt than anything. They prefer that over the dollar. It's some benefits to actually having good debt and being able to manage it.

SPEAKER_01 12:01

Absolutely. If you talk to any decent tax lawyer, pretty much any debt that comes from an appreciated asset, you can be able, you can write it off. You can write it off in some capacity. You're gonna want to talk to your CPA or your tax lawyer about that for specific details. But the truth is, is yeah, like Shabazz said, if you sell a house, if you or not even sell a house, you have a house and you have a mortgage, but you can write that off. I believe you can actually write off the insurance too, as well, to that mortgage of again a house. You and I don't believe, like since I haven't driven a car in 10 years, I don't believe you can do that for a car, right? Can you write off the insurance of a car?

SPEAKER_00 12:38

Shabazz? Uh it's a certain percentage that you can write off if the vehicle is used for business. Got it. Right. It's not a hundred percent write-off, but yeah, there is a uh certain percentage that you can write off.

SPEAKER_01 12:50

Okay, for business. But for personally, if a school teacher, and that's her only job, has a car she's personally using to go back and forth for work and other personal things, she can't write that off on her personal taxes, correct?

SPEAKER_00 13:02

No.

SPEAKER_01 13:02

Okay, yeah. So so yeah, you can't do that. You can do it with a house because the house generally appreciates over time. It's appreciating asset, but you can't do it with a car, which is traditionally a depreciating asset. To my point of yes, if you have a debt or insurance or anything like that associated with an appreciating property or asset, yes, you can write that off. You can write the debt off. And there's a lot of instances like that too. The other good thing about having good debt, it ties to having assets, right? We pretty much laid it out earlier. Good debt is tied to assets that appreciates. Well, if you have assets that appreciates, then you can generally borrow against it, right? Whether it's your stocks, whether it is your home, whether it is something else, um, your business, you can borrow against it and then use that to make more money, basically. A la credit, and you can do that again with credit. You can do that with credit cards too. If you have a positive credit score, you have good credit, you can get yourself a low interest card or a no interest for 12, 18, 24 months promo card, you can leverage that. And we've talked about that extensively too. But you're right, the rich leverage debt or borrowing money, however you want to look at it. So there's this connotation that everyday people have that all debt has to be bad. And like I said to the top of the episode, ultimately, I feel that if you are in a situation, you don't want to have any debt. No one wants to have debt, but no one's gonna complain if you have a house, if you have an apartment complex, or if you know that you have a mortgage on, you're making money off that apartment complex, hopefully. So, Shabazz, what's other ways people could leverage their credit once they have good credit to make them some money? A la good debt. What's some other ways people can do?

SPEAKER_00 14:53

Yeah, man, you was reading my mind because I was sitting here thinking because it's not just the things that we mentioned, where you know, real estate, if you're investing in in stocks and uh or insurance or all these things that basically appreciate in value, there's other things that as well, those are just some of the main things that people know about. Now, if you have, for example, let's say you have a your entrepreneur, and let's say you get a business loan for ten thousand dollars, and basically you're gonna use that for marketing. You know what kind of return that you're gonna get by putting that amount of money in the marketing, right? And as long as it gives you a good return, like probably at least double your money or even more, guess what? You're able to pay back the loan, and you also made a profit at the same time. So that's good debt. That's not a bad debt. And I tell people all this thing all the time, and you're gonna hear me say it on Saturday when we have when we're with the students. Credit should be used to make more money. Right. That's it. It's just that simple. Whatever you're using, I mean, it doesn't necessarily have to be real estate or insurance or anything. Those are great things to actually put your money into and invest in. Whatever you're using credit for should be something that's gonna bring you back some kind of value or some type of return. And if you're utilizing it that way, guess what? Nine times out of ten, you will hardly ever have bad debt, right? Right. And I think that's the mindset. Like, credit is a tool. People think it's oh, it's just something where I could just finance stuff I can't afford. No, that's if that's by far the wrongest, the most worst way that you can use credit is to basically finance things that you can't afford in the first place.

SPEAKER_01 16:55

And to put an asterisk on that, Tabazz is talking about something that is depreciating in value, right? So obviously some people might be saying, What are you guys talking about? I can't no one can afford a$5 million apartment complex. Well, yeah, of course. Even if in some cases, even if you could, people are gonna borrow for that apartment complex because it's good debt. So when we say you can't finance things that you can't afford, we're talking about wants that don't make you money. So, listener, we're talking about those Jordans that you keep buying. You're talking about the makeup that you keep buying that you don't really need, or the biggest, most expensive brand. Let me clarify, women need their makeup. We're talking about the vacations that you're taking every other month when you only really can afford to take one or maybe none for the whole year. Um, we're talking about stuff like that. We're not talking about you taking a credit card. Maybe it is personal because you don't know about business credit yet, and you haven't listened to one of the five episodes me and Shabazz have talked ostentally about business. Please go check those out. We break it down for you. But maybe you're just using a personal credit card because that's all you know you have access to and you're using that. Let's just say you're using that to take some online courses. That's good debt. The good reason to have debt, credit card debt. That's one of the very few reasons I will say. If you want to use that credit card to educate yourself, that's fine. Again, you're investing in yourself. Hopefully, you're taking a class to gain you some skills. Maybe you're taking an AI masterclass or something like that. Completely fine. That's good, stuff like that. Or maybe you're paying a personal coach or a business coach to help you in your business. That's a good debt. That all falls under the category of expenses for businesses, which it's an appreciated asset. That's good. So we're not saying if it's a credit card, on it's everything on there is going to be bad because it's on a credit card. That's not what me and Shabazz are saying. It's what you're financing with the credit card. That's what we're talking about. So, and you guys know this. You guys have heard us talk about this extensively. You know that you shouldn't be doing that. And I get it, there's people where maybe they're not making enough money, so that's the reason why they have to leverage those credit cards. Well, that's where unfortunately you got to have a real sit down with yourself and maybe someone you trust, and you got to figure out a way to start making some more money, ultimately. I'm not saying that's the easiest thing to do. I understand all the challenges and shout out to everybody who are working 50, 60, 70, 80 plus hours a week. But this is what you got to do to get out of your situation, or this is what you got to do to get yourself in a better situation for yourself, for your partner, for your kids. You gotta make more money if you're in a situation where you're financing everything, especially groceries, insurances. Heck, you can technically again finance your rent or stuff like that. And you know, you gotta do something to increase your income. So maybe that's again taking some more courses, maybe that's switching job careers, maybe that's spending time with a specialist or a coach that can help you with that. These are all things you can do to increase your income so you can get yourself out of financing stuff that you really don't need or you really want. So, again, that's another way you can leverage credit so that's a good thing and not necessarily a bad thing. Any other ways we can leverage credit to help you make money?

SPEAKER_00 20:18

There's several ways. They're not just one way. There's several ways. But one of the things that I will say to that is that one of the things that where people get into this bad debt, especially with credit cards, is that everybody has a precious asset. Everybody here on this earth, we have time.

SPEAKER_01 20:37

Yeah.

SPEAKER_00 20:38

So that is your precious asset. And we're the reason why it's so precious is because you can't get time back. Once you're out of time, you're done. And what we have been programmed to do is to basically the only means of making money is to trade that time, right?

unknown 21:01

Right.

SPEAKER_00 21:02

And this is the mindset that they have programmed majority of the working class on. And don't get me wrong, I know some people hear me and they say this, they well, you act like working a job is a bad thing. I'm not saying that. You gotta do what you gotta do. But if you want my opinion, I think it's by far the worst way to make money. Um, and that's just my opinion. Because if I sat up here and I told you that, hey, how much do you make an hour working at your job? And you told me$20, and I said, hey, I'm gonna give you$20 for an hour of your time, you would think I was crazy. That's the difference. See what I'm saying? And you would be like, no, I'm not giving you an hour of my time, but you but that's what you're currently doing. Oh, well, that's different. No, it's not different, it's the same. So the thing that we have to understand is that we're taking our most precious asset and then we're putting it into something that. Is a depreciating asset, right? And basically, we done took the most precious thing that we cannot get back and bought something that's going to lose value, right? And we put it into something. And basically, now you got to stay on this hamster wheel because you keep investing your time into depreciating assets. And what happens is as you get older and you don't have that same amount of energy that you once had, and how much longer can I keep up this thing on this hamster wheel? You start realizing I need to start making my money work for me instead of me always working for the money. And that's the thing that we got to start thinking about. How much, how value, because if you ask somebody generally, like how much is an hour your time, they wouldn't, I guarantee they will say it's way more than what they're getting paid hourly for the job that they're working at. I guarantee it. You know, but it's the mindset. And when you look at it that way, it's like, oh, hour am I time? People will say astronomical numbers at that point.

SPEAKER_01 23:09

Yeah.

SPEAKER_00 23:09

But but you're settling for this. So if that's the case, if you feel like your time is worth this, then why don't you go and get what you're worth?

unknown 23:16

Right.

SPEAKER_00 23:17

You see what I'm saying? And I'm just saying this like a lot of people are actually financing their life with their life. That's what they're doing. And it's never going to get any better until you change this mindset.

SPEAKER_01 23:31

Right.

SPEAKER_00 23:32

You know, and I just, and that's why I challenge so many people. Like, you know, you're gonna have to challenge the way you think about money. Yeah. You know?

SPEAKER_01 23:42

Yeah, so you know, and and to clarify, and I'll kind of give my perspective, I I I personally generally agree that entrepreneurship is the preferred path. Um, but I'm not closing down the idea to a double Q. I've said it multiple times. There's clips of me you can see right now on the Instagram page of me saying, if someone's gonna cut me a big enough check and they understand my situation, they will take that into consideration. Someone being an employer, they want to cut me a quarter million dollar check a year or something around that size, and they get it. I get I'm going W too. Like I said, if our producers counsel a B, they say, Darren, we love the show so much, but you're gonna be owned by us and it cuts a quarter million dollar check. Oh man, Felicia's gonna be my boss telling me what to do, and I'll be happy, more than happy to do that. And there's nothing wrong with that. There's a lot of people, there's a lot of nurses, there's a lot of engineers, there's a lot of T directors right now making good, good, good money, and they're working a job and they're being taken care of. You know, my my partner has a great job, has great benefits, and she works at W-2. There's necessarily nothing wrong with it. The point that, you know, where me and Shabazz agree on, and he said it on the second half of his explanation: what is that dollar amount worth for you in your situation? Everybody's situation is different. If you're a 20-year-old single man, that dollar amount is gonna be lower than a mother, a single mother of three kids. That dollar amount is gonna be way lower. So it's not universal. So that's why we're not throwing out blanket numbers. It's different for everybody's situation because everybody's situation is different. So what is your dollar amount? That's something you gotta think about. And going back to the topic at hand, good credit versus bad credit, that's why we're so we keep saying the same thing on these episodes. Like we see it as financial coaches, we see the decisions people make when they're investing their time for the money. Money is a tool and it's almost the only physical manifestation of time. When you pull out, you know, a$20 bill, that's an hour for minimum wage workers. So that's an hour right there physically, is your$20 bill. How do you choose to burn through or spend that$20 bill? Do you choose it to help you pay for an educational course that'll develop your skills? Do you choose it to help you pay for gas money because you're Ubering on the side? Do you use it to help you pay for a pair of Jordans that you absolutely don't need because you have 200 pairs sitting in your garage? The choice is yours, as they say. But those simple choices is what's gonna categorize the good debt versus the bad debt. Those choices are gonna categorize whether you're gonna be in debt for five years, 10 years, 15 years, forever, or you're gonna be debt-free. It's choices at the end of the day. People, you know, I hear it, people, it's not easy. This year is no better. Things are expensive, cost is high, especially if you're in California, but you don't got to be in California. Cost is high everywhere in the world. I get it. We understand. I'm not saying any of this is fair. What I'm saying is the solution. You have to make better choices or get your or make the decision to put yourself in a situation where you can make better choices. Hey, Darren, I have, I don't make enough money. I hear you. Why don't you make enough money? Well, because I'm flipping burgers at McDonald's. Well, let's get you out of flipping burgers at McDonald's. Like, we gotta make some changes over here. No one, you know, I don't, you know, Aldus Blunt let's say it. If you're making minimum wage, of course you're not, you're of course you're not gonna be able to afford what you want. Especially in California. If you're making$20 an hour,$15 an hour,$17 an hour, whatever the minimum wage is in California, you're not gonna be able to get what you want. You're gonna have to use a credit card. That's where you have to make the choice. Are you gonna stay flipping burgers? Are you gonna do something to make you more money? Shout out to everybody who flips burgers. I love my quick late nights at Jack in a Box. I need my services. It's not to down anybody, but this is we're speaking the truth, you guys. Like we're speaking the truth. You gotta make decisions and choices. And that's just overall in life. That's the part of the mindset, and that goes to the topic of hand of good debt versus bad debt. Make those good choices so you're not financing everything forever. I'm not even mad at people, again, who use credit to finance stuff in the beginning. Hey, I get it. You're in college, you're a college student, you are working, you know, part-time, you're doing what you need to do to pass the classes, and maybe you use for$20 to get you a quick snack. No one's gonna complain and no one's gonna waddle their finger like, oh my god, you got a couple couple noodles for$5. How dare you? No one, we're not talking about that, listener. We're talking about consistent choices over a long period of time, and that's habit, and those habits are the reasons why you go down the good debt path or you go down the bad debt path. So, Shabazz, anything else you want to add to the topic?

SPEAKER_00 28:50

Yeah. Um you know, as Darren mentioned, you know, money is a tool, credit is a tool. Um one of the things I would say to people, and this is and this is real, having good credit or having excellent credit is ground level when it comes to building wealth. And I want to repeat that. Having good credit or having excellent credit is ground level when it comes to building wealth. So, and I say that to say if you haven't put yourself in position to get in position to have good or excellent credit, you're not even in the running. Okay, you can't even get to the other various investments without that. How about that? So that like when I say ground level, and and guess what? A lot of people are not at ground level. That's the that's that's that's the sad part about it. A lot of people are not even at ground level. So make it a point to get on ground level, and then you can level up. So, you know, and and and if you you know you want to participate in this wealth game, hey, that's the good that's a good place to start.

SPEAKER_01 30:12

Yeah, yeah. So it's gonna be a short episode, you guys. We're gonna wrap it up there. Thank you guys for tuning in. This has been your host, Darren Harvey and Shabazz over here at Financial State of Minds. This is the show where I help you get to that bag, manage that bag, and grow that bag as best as possible as we discuss financial literacy and anything at all to do with the power of dollar. You've been tuned in to KGPC 96.9 FM streaming right now on KGPC969.org and available on all streaming platforms of choice. Please share, like, comment on your walkingness on YouTube. Subscribe if you haven't already, and subscribe to our nonprofit pick at PSN underscore org and financial statement.