While most of us get the general principle that we need to go into debt if we want to build up our credit, it’s tough to know exactly how far you should go. When you’re first starting out, it’s all too easy to get buried in bad debts that run into tens of thousands of dollars and it can take years to undo the damage that has been done. However, there are some simple rules of thumb that you can follow to help you determine how much debt you can safely use and what you’ll need to avoid in order to stay on top.
First, it’s important to understand the difference between bad debt and good debt. Yes, there actually is “good” debt, but you’ll need to be smart about your choices. Good debt is debt that can be leveraged to create income for you. Bad debt is the kind of debt that happens when you overspend on frivolous things that won’t make any sort of return. It’s perfectly fine to go into good debt, and in fact, most of the world’s millionaires have used this very technique to get where they are today.
Why is there such a disparity between these millionaires and the average American that’s trying to figure out how to make ends meet? The key is in how they use their debts. While there are exceptions to the rule, most business people don’t run out and blow a loan on the latest this or that. They use that loan to make an investment to create another stream of steady income. Over time, you can build up multiple income streams using this technique and you can end up making more money with these than you can with your old job.
The average American however may not know this. They’ve been trained to overspend, to run out and blow their paychecks on the latest clothes or electronics. All the time they’re spending, the interest rate charges are piling up and they’re getting deeper and deeper into debt. At the end of the day, a shirt may look nice, but it’s certainly not going to secure your future.
So, how do you know how much debt you can comfortably go into? If you’ve already established that your going to use that money wisely on new opportunities to create more income, you’ve got a little more wiggle room. It’s a good rule of thumb to use your salary as a guide as to how much debt you can comfortably handle. At first, try not to exceed three months of your current salary. This will help you learn the ropes and you won’t have the risks of getting in over your head.
As you start to make money from your multiple streams of income, you can invest this back into making more money or you can just pay off the old loan and get a new one to keep the process going. Never go into debt for the wrong reasons – and never let your debt get out of control.
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