Investing 1: On good debts

I used to have this negative view on borrowing money. This creates the mindset of avoiding loaning as well as paying debts/loans as soon as possible. But when it comes to investing, it all comes down to the balance sheet. Concisely, if the money borrowed can be used to generate income greater than its interest payment, then it is a good debt. As an example, say I have a car loan of $11,000. This is a liability and I have to pay $220 per month, which means the interest rate is 220 / 11000 * 100 = 2%. This is a very low rate and a sound investment should yield a return higher than this. So now if I have 11000, paying the debt reduces my expenses by $220 per month. The act of paying the liability can be thought of as an ‘investment’, yielding $220 per month. Now if I can invest somewhere that give me say 5% then I am better off by 0.05*11000 – 220 = $330 per month. 

The bottom line is there can be good debts if the borrowed money is put into good uses. In reality, however, it should be noted that gaining a 5% return rate on investment (on average) requires careful analysis and experience.

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