Wealth Building – BAD Debt Vs. GOOD Debt

Published on 28th June 2018

Back to the Beginning – You may not know this, but I was actually not born in Canada. I immigrated here with my parents when I was very young so I had a Canadian upbringing (not sure what that really means, but definitely lots of hockey though).

My parents, on the other hand, had a difficult time getting a job in Canada when we landed as they were not fluent in English. My dad owned a refrigerator strip manufacturing business in China, which he sold to immigrate to Canada, and my mom was a seamstress. Without being fluent in English though, they were forced to work at a Chinese restaurant, similar to most other non-English speaking Chinese immigrants.

Traditional Teaching – As a result of my environment at home as a child, this led to the constant teachings of go to school, get good grades, and get a good job.

What that translated into was pay attention in class, study hard, and get a white-collar job with pension and benefits.

This belief was entrenched in me for over 20 years.

I knew why it made sense, mathematically and financially. If I increase my skills and worth to an employer with school, my value per hour to my company will increase. Hence my income will increase. The goal was to increase my skill level to $50/hr so that I could make six figures. Then after all of that, I can have a comfortable life.

That was the dream.

Unfortunately, The World Has Changed – That dream doesn’t exist for me anymore (and generally speaking, that dream is fading for many young people in Toronto as well). Rather, it was a dream that my parents sold me.

Even with a six-figure income, which is double the average income, one can barely afford a 1-bedroom condo downtown these days; let alone being able to pay off any school debt while saving up for a down payment.

The AHA! Moment – Through a series of unfortunate events at the time (but fortunate looking back now), I realized that what my parents had taught me, despite all of their good intentions, was actually going to make me poor. One of the lessons that turned my financial life around was the concept taught in Robert Kiyosaki’s popular book, “Rich Dad Poor Dad”. That lesson was the difference between good debt and bad debt. I wish I didn’t have to learn this the hard way.

This is very important and it took me forever to understand because I was raised to squirrel money away and pay off my debts as quick as possible to avoid paying extra interest. The following summarizes the simple difference between good debt versus bad debt.

Good Debt – Payments are covered by someone else.
Bad Debt – Payments are covered by you.

It sounds simple in theory, but hard in execution.

Let me give you an example.

Bad debt is using your line of credit from your house (HELOC) to pay for kitchen renovations for your own personal home. Who pays for this? You do! Yes, I know what you may be thinking – there is “resale” value and you can re-cooperate the cost of renovations in the end, but ultimately it is you who are paying for these costs until the house is sold (which may be a long time down the road). This is an example of the poor use of debt.

On the other hand, good debt is using that same line of credit from your house (HELOC) to acquire a rental property that pays for itself. Who pays for this newly acquired house? Your tenant will perpetually pay for all of your expenses, including interest on your HELOC if done correctly. This is an example of a great use of debt.

Money That Works For YOU – What I learned was that in order to be wealthy, it’s not just about chasing after that six-figure job, but rather it was about being smart with my money so that I could let my money work for me instead of having to work for money.

Doing a kitchen renovation with your HELOC would mean that you are working for money to pay off that borrowed money. Instead, if you invest your borrowed money in a rental property, your money would be working for YOU via consistent rental income and mortgage paydown.

The Wrap – This lesson has changed how I view money for the rest of my life. It has also shaped how I build wealth for the rest of my life. I hope this Insight Article strikes the same aha! moment for you as it did for me when I learned the difference between bad debt versus good debt. Give us a call to see what good debt in real estate can do for you!

Until Next Time, Happy Real Estate-ing,
Zhen
(416) 436 9436

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