GOOD COP, BAD COP (GOOD
DEBT, BAD DEBT)
Some
debt is good. Some debt is bad. Seems simple enough, right?
Good
cop, bad cop refers to a law enforcement investigatory technique, which may or
may not lead to a confession from a suspected criminal. Basically one cop
presents themselves as the bad cop, belligerent, unrelenting to any of the suspect’s
requests. Then the bad cop is relieved by the apparently good cop who usually
goes over and beyond to be nice to the suspect. This is all done in hopes of
getting a confession. The good cop or the bad cop has any true regard for the
well-being of the suspect beyond the cooperation with law enforcement to
further their cause. Good cop, bad cop scenarios are frequently represented in
crime shows like Law and Order
and most recently CSI.
In wake of the financial fallout of 2007 and on the
horizon of a seemingly looming fiscal cliff it seems as though all creditors
are out to get us. One company offers us a credit card then the next company
comes right back and offers to consolidate all our debt and magically fix our
debt issues. In this day and age many people are living by the financial rules that
were handed down from generations ago. Facing such uncertainty, people are
saving money, sitting on piles of cash hoping things will settle down. The
problem with this strategy is that savers are often losers because as the Fed
prints record amounts of money savings lose value, especially as inflation
kicks in and grows faster than the interest paid on savings.
Others, the financially intelligent, are making a
lot of money and borrowing more of it. Why? Interest rates are at the lowest in
history and many assets are priced at bargain bin prices.
Those who have a high financial IQ are borrowing
money to offset their existing debt then taking the money they are borrowing
and using it to capitalize on various investment vehicles.
Making good debt work for you
Good debt, if there is such a thing, is defined as
this, money that is working for you rather than working against you.
For instance, if I’m using debt for a business
deal, I won’t do the deal unless the cash flow from the deal pays for my debt
payment and expenses while providing a good return.
This assures that cash comes into my pocket each
month, providing a continual income that allows me to enjoy liabilities. The
great thing about debt is it allows me to leverage my existing cash into many
assets.
For example, in real estate, I can buy investment
properties with debt. I can then go down to my bank and secure a loan for 80 percent
(I must put down the 20 percent) of the purchase price of the investment property.
In order for this to become classified as good debt I must make sure this
investment deal covers my payment that is due every month on the loan from the
bank.
I can use the income from my properties to either
invest in more assets or I can buy something nice for myself or for my family
knowing that more cash will come next month from my investments.
Borrowing
for a home or college usually makes good sense. Just make sure you don't borrow
more than you can afford to pay back, and shop around for the best rates. This can be an excellent investment strategy when you have great credit.
Some debt is bad
Don't
use a credit card to pay for things you consume quickly, such as meals and
vacations, if you can't afford to pay off your monthly bill in full in a month
or two. There's no faster way to fall into debt. Instead, put aside some cash
each month for these items so you can pay the bill in full. If there's
something you really want, but it's expensive, save for it over a period of
weeks or months before charging it so that you can pay the balance when it's
due and avoid interest charges.
The
key to getting out of debt efficiently is first to pay down the balances of
loans or credit cards that charge the most interest while paying at least the
minimum due on all your other debt. Once the high-interest debt is paid down,
tackle the next highest, and so on.
Don't be so quick to pay down your mortgage
Don't
pour all your cash into paying off a mortgage if you have other debt. Mortgages
tend to have lower interest rates than other debt, and you may deduct the
interest you pay on the first $1 million of a mortgage loan. (If your mortgage
has a high rate and you want to lower your monthly payments, consider
refinancing.)
If you have any additional questions then contact us today at 1-888-824-7622 or The Credit Genius.
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