As busy dads, we often find ourselves trying to balance work, family, and finances all at once. It’s easy to feel overwhelmed by the different pieces of financial advice floating around, especially when it seems like everyone has a different opinion. Inspired by the work of Robert Kiyosaki, particularly his ideas on good debt versus bad debt, this article is here to offer a practical, mindset-focused approach to financial stability.
Kiyosaki’s insights aren’t a quick fix for financial challenges—they won’t erase debts overnight or suddenly make us rich. Instead, they offer a helpful way to think about how certain types of debt can be useful tools for growth, while others might hold us back. The key takeaway? It’s all about making informed decisions rather than looking for shortcuts. Every family’s financial situation is different, so it’s important to find what works best for you.
In this article, we’ll break down how to tell the difference between good and bad debt, why keeping an eye on our fixed costs each month is crucial, and why it’s a smart idea to consult with a financial advisor before making big decisions. Consider this a starting point for thinking about money in a way that’s more sustainable and aligned with your long-term goals.
Read more around being your own economy and having responsibility for your time, money and resources.
What is Good Debt?
Debt often carries a negative connotation, but in reality, certain types of debt can be powerful tools for improving your financial situation. Good debt is essentially any debt that helps you generate cash flow, save money, or improve efficiencies in your life. When used wisely, good debt can be an investment in your financial future, making your life easier and more prosperous.
Examples of Good Debt
Mortgage:
Owning a home is not just about having a place to live—it’s also about building equity. As you pay down your mortgage and if your property value increases, you create a significant financial asset that can serve as a cornerstone for your long-term wealth. Additionally, if you can rent out a part of your property, like a basement apartment or a separate unit, your mortgage becomes a source of passive income, effectively turning your home into a cash-flow asset.
Debt for Income-Generating Assets:
Taking out a loan to purchase income-generating assets, such as rental properties, is another form of good debt. These assets can produce a steady stream of income while potentially appreciating in value over time. The key is ensuring that the income from these assets exceeds the cost of the debt, providing positive cash flow and increasing your financial stability.
Investing in Energy-Efficient Home Improvements:
Loans taken out for energy-efficient home improvements, such as solar panels or better insulation, can be considered good debt. These upgrades can reduce your monthly utility bills, leading to long-term savings. Over time, the savings on your energy bills can outweigh the cost of the loan, effectively making this debt a positive investment in your home and finances.
Benefits of Good Debt
Good debt is about more than just borrowing money—it’s about making strategic decisions that can lead to financial growth. Whether it’s through generating passive income, saving on costs, or improving efficiencies, good debt can help you build a more secure financial future. The key is to ensure that the debt you take on aligns with your long-term goals and improves your overall cash flow.
What is Bad Debt?
Bad debt is the type of debt that doesn’t contribute to your financial well-being and can often lead to long-term financial strain. This kind of debt typically arises from short-term thinking, consumerism, and impulse purchases, where the borrowed money is used for items or experiences that do not generate income or appreciate in value. Bad debt can trap you in a cycle of repayment without any lasting benefits.
Examples of Bad Debt
Credit Card Debt:
One of the most common forms of bad debt is credit card debt, especially when it’s accumulated from impulse purchases or lifestyle choices that go beyond your means. High-interest rates can quickly compound, making it difficult to pay off the balance. For instance, buying the latest gadgets, dining out frequently, or funding vacations on credit can lead to a mountain of debt that offers no return on investment.
Personal Loans for Non-Essential Items:
Taking out personal loans to finance things like luxury cars, expensive vacations, or the latest tech is another example of bad debt. These items depreciate quickly or provide only short-term satisfaction, leaving you with ongoing payments but no lasting value.
Payday Loans:
Payday loans are a particularly dangerous form of bad debt. They’re often used to cover short-term needs, but the extremely high interest rates and short repayment periods can lead to a debt spiral that’s hard to escape.
Auto Loans for New Cars:
While having a reliable vehicle is important, financing a brand-new car that loses significant value the moment you drive it off the lot is often considered bad debt. It’s a depreciating asset, meaning you’re paying interest on something that is losing value over time.
The Impact of Bad Debt
Bad debt not only drains your finances but also limits your ability to save and invest for the future. It can keep you stuck in a cycle of living paycheck to paycheck, with much of your income going toward interest payments rather than building wealth.
As discussed in the article on frugality from Dads in Business, adopting a more frugal approach—such as prioritizing needs over wants, delaying gratification, and avoiding impulse buys—can help you steer clear of bad debt. By focusing on long-term financial health rather than short-term pleasures, you can make decisions that benefit you and your family in the long run.
This super conversation from the Rich Dad Poor Dad YouTube channel is well worth a few minutes of your time!
Some practical ideas to help manage and Avoid Bad Debt
Managing and avoiding bad debt is all about making mindful decisions that prioritize your long-term financial health over short-term gratification. Here are some practical steps you can take to stay on the right track:
Budgeting: Stick to a Budget
One of the most effective ways to avoid unnecessary debt is by creating and sticking to a budget. A budget helps you see where your money is going and allows you to allocate funds for essentials, savings, and planned expenses. Start by tracking your income and expenses for a few months to understand your spending habits. Once you have a clear picture, create a budget that covers your fixed costs, such as mortgage or rent, utilities, and groceries, while leaving room for savings and a bit of fun. The goal is to live within your means and avoid spending more than you earn. If you’ve never budgeted before, consider starting with the 50/30/20 rule: 50% of your income for needs, 30% for wants, and 20% for savings and debt repayment.
Emergency Fund: Build a Financial Safety Net
Life is unpredictable, and unexpected expenses can easily throw your finances off course. To avoid relying on credit cards or loans when emergencies arise, build an emergency fund. Aim to save at least three to six months’ worth of living expenses in a separate, easily accessible account. This fund will act as a financial safety net, allowing you to handle unexpected costs—like car repairs, medical bills, or job loss—without falling into bad debt. Start small if necessary; even setting aside a little bit each month can add up over time.
Prioritize Debt Repayment: Tackle High-Interest Debt First
If you already have bad debt, such as high-interest credit card balances or payday loans, make paying it off a priority. Start by listing all your debts, along with their interest rates and minimum payments. Focus on paying off the debt with the highest interest rate first, while continuing to make minimum payments on the others. This approach, often called the “avalanche method,” minimizes the amount of interest you’ll pay over time and helps you become debt-free faster. Alternatively, you can use the “snowball method,” which focuses on paying off the smallest debt first to build momentum. Choose the method that feels most motivating to you.
Smart Borrowing: Borrow with Purpose
Before taking on any new debt, ask yourself whether it will help you achieve a long-term goal or improve your financial situation. Smart borrowing means only taking on debt that serves a productive purpose, such as investing in income-generating assets or making necessary home improvements that will save you money in the long run. Avoid borrowing for non-essential items or experiences that provide only short-term satisfaction, like luxury goods or expensive vacations. Remember, just because you can borrow money doesn’t mean you should. By being selective and intentional about debt, you can avoid falling into the trap of bad debt.
Mindset Shift: Embrace Delayed Gratification
Finally, one of the most powerful tools for avoiding bad debt is adopting a mindset of delayed gratification. This means prioritizing long-term financial health over immediate desires. When you feel the urge to make an impulse purchase, take a step back and ask yourself if it’s something you truly need or if it’s worth going into debt for. By practicing patience and focusing on your bigger financial goals, you’ll find it easier to resist short-term temptations and make choices that support your long-term well-being.
Read more around this topic in the helpful article talking about desire vs compulsion.
Real-Life Scenarios to help offer a different perspective.
In this section, we’ll explore common financial decisions that many of us face and how to navigate them wisely. Each scenario highlights the importance of distinguishing between good and bad debt, helping you make choices that align with your long-term financial goals.
Scenario 1: Buying a Car – Should You Finance or Save Up?
Deciding whether to finance a car or save up to buy one outright is a common dilemma. Financing can be tempting because it allows you to drive away in a new vehicle without waiting. However, cars are depreciating assets, meaning they lose value over time. If you finance a car with a long loan term, you could end up owing more than the car is worth—a situation known as being “upside down” on your loan.
Quick Tip: If you need a car immediately and financing is your only option, opt for a used car with a short loan term to minimize interest payments. Otherwise, consider saving up for a reliable used car that you can afford without a loan, avoiding bad debt altogether.
Scenario 2: Home Improvements – When Is It Worth Taking a Loan?
Home improvements can add value to your property, but not all upgrades are created equal. Taking out a loan for necessary improvements, like replacing an old roof or upgrading insulation, can be considered good debt because these changes can save you money on utilities and increase your home’s value. On the other hand, borrowing for cosmetic upgrades or luxury additions that don’t add significant value may not be worth the debt.
Quick Tip: Before taking a loan for home improvements, consider whether the project will increase your home’s value or reduce future expenses. If the answer is yes, it might be worth the investment. If not, it’s better to save up and avoid unnecessary debt.
Scenario 3: Education – How Much Student Debt Is Too Much?
Investing in education can be one of the most impactful financial decisions you make, but it’s important to be cautious about how much debt you take on. While student loans can be considered good debt if they lead to higher earning potential, it’s crucial to balance the cost of education with your future income prospects. Attending an expensive school without a clear return on investment can leave you burdened with debt for years.
Quick Tip: Before taking out student loans, research the potential earnings in your chosen field and compare them with the cost of education. Aim to keep your student debt manageable by exploring scholarships, attending in-state schools, or starting at a community college.
Final Takeaway:
In each scenario, the key is to weigh the long-term benefits against the short-term costs. By making informed decisions and focusing on debt that either increases your financial stability or adds value, you can avoid the pitfalls of bad debt and move closer to your financial goals.
Conclusion and an invitation to this differently.
Navigating the world of debt can be challenging, but understanding the difference between good debt and bad debt is a crucial step towards financial stability. Good debt—like investing in a home, necessary home improvements, or income-generating assets—can help you build wealth and achieve long-term goals. On the other hand, bad debt, often driven by short-term thinking, consumerism, and impulse purchases, can hold you back and create financial stress.
As busy dads, it’s important to be mindful of the debt we take on, ensuring it serves a productive purpose rather than adding unnecessary strain. By making informed decisions, prioritizing long-term benefits over short-term desires, and adopting a mindset focused on sustainable financial health, you can protect your finances and secure a brighter future for your family.
Give it a go…
Now that you’ve learned the basics of good and bad debt, take a moment to assess your own financial situation. Are there areas where you might be carrying bad debt? What steps can you take to shift your mindset and make smarter borrowing decisions? Consider sharing this article with other dads who might benefit from a fresh perspective on managing debt.
If you’re looking to dive deeper, explore further reading on financial planning, check out budgeting tools, or consult with a financial advisor to get personalized advice. Remember, the journey to financial stability is ongoing, but with the right mindset and tools, it’s one you can navigate successfully.
Financial literacy really interests me and I think it should be something taught in our schools rather than being something we often self study. Robert Kiyosaki amongst others talk about financial literacy and I offer some input to the topic on the Dads in Business blog.
