Not everyone should pay off their debt first. Often times, business owners or professionals have some debt to finance their businesses. The long range goal should always be to build wealth and sometimes it’s okay to have some debt.
There is such thing as “good debt.” If the debt allows you to create income, it can be considered good. For instance, a rental home may have a mortgage, but it allows you to create a passive income from the rental payments. Bad debt is credit cards that have compounding interest rates and don’t provide any opportunity to income.
When you will be carrying a debt for medium to longer term, weigh the interest rate on the debt against your income growth and potential investment returns over the term of the debt. If the rate of interest associated with the debt appears to outpace your growth income and returns, then you will want to pay that debt down as fast as possible. Your debt growth rate should not be higher than your average income growth rate. Look at your primary job and all other sources of income when calculating this figure.
By paying off “bad” debts and reducing the amount of accumulation of new debt will improve your FICO score and lead to lower interest rates on credit cards and other loans. A good FICO score allows you to take steps closer to financial freedom.
Wishing You Wealth in all its Greatest Forms,
Alex
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