A good debt is something you borrow that goes up in value and that makes you money. A good example is to buy a house and to rent it afterwards.
A bad debt is something you borrowed to purchase that goes down in value. This is the one that every body hate and you need to get rid of it as soon as possible. I know that seems obvious to say that but you would be surprised to see how many people out there keep spending money while they are tremendously in debt.
So if you are in bad debt right now I am going to give you a technique to eliminate your debts in 3 to 7 years. Some people have used this technique and managed to eliminate $146,000 of debt in 6 years.
Let’s say you live with a partner and you are in the following situation:
Read the table like this: You are in debt of $100,000 for your home, you pay it off at $1,000/month and you need to do it 100 times.
To pay off all you debts you are able to find $230 in your budget every month (you already payoff $2,300/month but manage to find $230 spare).
If you want to eliminate your debts rapidly you will have to payoff each of them one by one starting with the lowest.
The first month you start to payoff Master card using the $230 spare and add it to the $200 you already pay. In that case you can payoff the Mastercard with $430/month. If you divide $3,000 by 430 you find 7. So you pay off the debt of your Master card in 7 months instead of 15.
Then you take the 2nd lowest debt. In 7 months you completely got rid of the Master card debt so you have $430 extra. You can now add $430 to the initial $400 so you will pay off the car 2 with $830/month. If you divide $15,000 by $830 you will pay off you debt in 19 month instead of 38.
You already pay off the car 1 with $700/month but now you can definitely add $830 spare. So you divide $20,000 by 1530 (830+700) and you will pay for 14 months instead of 29.
Lastly you pay off the home loan. You now have in spare $1530 and you add it to the $1,000 you already pay. You divide 100,000 by 2,530 and in 40 months you will have completely eliminated the debt for your house. So now if you add the number of months to pay off the Master card, the 2 cars and the home loan you find 7+19+14+40=80 80/7=6,6 years In less than 7 years you will be able to pay off all your debts following this strategy. In reality it would be even sooner than that as the $15,000 for the car 2 for example would have already reduced to less because of the payments for the first 15 months.
You can finally eliminate your bad debts and start focusing on the good ones that bring you money.