Good Debt: Entrepreneurs Investment Strategy #1

22 Oct

Strategy One: Till Debt Do Us Part
Good debt and bad debt.

In your business or for personal investments “Good debt” is when you borrow money to make money. “Bad debt” is debt that you accumulate because you have consumed something, but which doesn’t add to your business or personal net worth. Knowing the difference is one of the key rules to growing your wealth.

Whether you are an entrepreneur or an individual, discipline is involved in getting out of debt. On the business side, it starts with a business plan, making a budget and tracking sales and expenses against that budget to measure your progress. At times you borrow money to invest or pay off a company credit card. Your bank may even give you a line of credit to help finance your trade receivables.

I remember getting a special loan to spruce up our school when it needed a makeover to impress sophisticated students. This kind of  good debt is not a bad thing, as it helped us to compete and gain market share. If you borrow for your business, make sure the amount is reasonable, is spent on the identified project and can be paid off, even if the economy takes a downturn. Don’t borrow large sums of money to prop up a struggling business if you are likely to go bankrupt. Cut your losses.

good debt versus bad debtAs an individual, if you have non-mortgage debt, you should get rid of it as soon as possible. Take the debt that charges the highest interest rate and pay it off the fastest. Maintain the minimum payments on all other debts (doing this protects your credit rating). When that first debt is gone, start on the one that charges the second highest interest, and so on. Give yourself a pat on the back each time you knock a debt off your list. When all debts have been paid off, start investing the money you formerly used to pay down loans.

Some investors borrow money to invest and the interest may be tax deductible. This can be an example of good debt. There are other creative ways to use borrowing or leveraging to your advantage. Contact me if that is a subject you would like to discuss (mheenan@assante.com or 1-855-939-2001). As with all debt, caution is necessary as you take on more risk when you borrow to invest.

Tip: Ask for a lower interest rate from your lender. Try three times. If the first person says no, ask for their manager. Every little bit helps!

Just good advice.

In my next blog post I will talk about Torn Between Two Lovers: TFSA or RRSP.