This is where your finance takes place

Today, I’m introducing another concept of financial planning. It starts from our perception of debts. There are a lot of people that are convinced that you need to pay off all your debts as soon as possible. Their monthly payments are their bigger fear and instead of searching how to make money, they are searching how to pay off their mortgage fast. However, I think that debt can be good for you. It all depends on its usage.

Let’s start with the easy part; what is a bad debt? While most people would think that all debts are bad, some of them are worst. Everything related to consumer debts such as credit cards, lines of credit, car loan or car lease are considered bad debts. They are high interest debts and most of the time, what you purchase will require maintenance fees.

Bad debts are related to goods that don’t produce income. Therefore, you pay interest, you pay for maintenance but you are not making money out of it. The only benefits are psychological and physical comfort. No money in your pockets.

However, some debts are related to an asset. As previously mentioned, an asset creates wealth. Investment loans, RRSP loans and borrowing money to invest in a company are examples of good debts. You still have to make your monthly payments, however, you will benefit from extra cash flow in the long run.

In addition to that, most governments have tax reduction programs related to good debts. In Canada for example, you can deduct the interest paid on an investment loan from your total income. So as you are making money on your investment, you are paying fewer taxes to the Government. I’m telling you, tax laws are made for rich people!

As you can see, it is not really the amount or the interest rate that make a debt good or bad. It is more related to the usage of the money that you are borrowing. Another incentive should be that most of the time, interest rate on good debts are lower. It definitely pays to borrow!

If I paid for it, therefore, it has a value. If it has a value, it must be an asset. This logic is too often use by several individuals. But what is the exact definition of an asset? Or should I write: But what is the correct definition of an asset? Paying $2,000 for a new TV won’t get you much than watching Lost on a bigger screen… and maybe with better sound! But using the same $2,000 to buy an asset might make you rich someday.

An asset creates wealth, it gives the holder the opportunity to receive a positive cash flow months after months. An asset doesn’t incur negative cash flow on a long term basis, it should create money, it should create cash flow. Therefore, buying more assets means getting richer and richer. This is why you have to focus on creating cash flow instead of watching Evangeline Lilly on the beach. Mind you, you can probably do both!

All investment types are definitely categorized as being assets but they are more. As it is not the asset itself but the usage of it that determines what is an asset, everything can become valuable at a certain point. A property can become an asset if you rent it out or if you are buying and selling property to make capital gain. The property you just bought will be more likely an asset as the purpose is to make money differently than with a regular salary.

Companies, side lines and other forms or entrepreneurship represent assets as well. Even websites can earn income and therefore become more than a hobby. Those assets however, require periodic investments that will decrease your monthly cash flow. It all comes down to the return you get on your money.

Making the difference between goods and assets is fairly simple. However, acquiring them is sometimes a lot more difficult. Try to breakdown your balance sheet and pull out your assets. Unfortunately, most people don’t have many of them.