By: Dr. Lorie Nicholas, REIA NYC Financial Literacy Coach
In the financial world, one of the most powerful 4 letter words that can invoke a variety of emotions in a person is the word “Debt.” When you hear this word, take a few minutes and explore the first thoughts, feelings and images (what I am going to refer to as sensory perceptions) that come into your mind. Were those thoughts, feelings and images positive or negative? Did you find that you did not have a reaction at all, or did your sensory perceptions automatically kick in? It’s amazing how a four letter word can cause a variety of emotions in the lives of most people.
The general definition for debt is related to money that is owed to someone. For instance, a debt to a credit card company, or a debt to a family member in exchange for a loan, service or product that was received. Did you know that according to a CNBC report (2015) that approximately 8 in 10 people are living in debt? With this in mind, debt, once a taboo area, seems to now be a normal part of a majority of people’s lives., whether they choose to talk about it or not.
Now a question that often comes up, is whether buying or investing in a home is considered good or bad debt. There was a time when all you heard in real estate seminars was that buying real estate is good debt. However, this depends on a number of factors. First, let’s understand that unlike bad debt in which you owe money, in dealing with good debt, you are engaged in an investment that is bringing money to you, that can be considered as an asset to your financial portfolio.
So to clarify, if that home or real estate investment is costing you a lot of money, and is not adding value to your finances, then you are most likely in a bad debt situation. If on the other hand, that property is costing you money, but is adding value to how much the property will be worth (adds equity), then this would be an example of good debt. If putting money into your property enables you to charge higher rents or sell the property at a higher price than what you originally paid, then spending the additional money to enhance the property may be perceived as a good investment.
The key factor in having that real estate investment be of value is the goal of buying that real estate investment at a low price, then being able to sell that property at a higher price. So now that you have learned how you want to ideally be set up to buy real estate, let’s go back to reviewing where you stand in your Debt status.
If you were to look at your current situation in terms of where you stand with your debt, would you say:
- I have no debt, neither good nor bad debt
- I have only bad debt, no good debt
- I have no bad debt, only good debt
- I have both bad and good debt
Based on the scenarios listed above, and your thoughts, feelings, perceptions, images and experiences about being in debt, assess how much debt you have (both bad and good). Based on your comfort level, make a plan in terms of where you would like to be in the four debt status areas outlined above. Create a plan to strive for the debt status you would like to achieve. As you make changes toward the debt status that fits with your comfort level, this will in turn also have a direct impact on your sensory perceptions.