What Is "Good Debt"?



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Very early on in my investment career, while I was still in college, I got an investment opportunity from a woman. She wanted me to give her $1,000, which she would pay back every month at 4%. I was intrigued, but my first thought was that it was a scam. So I asked her, "Why such a high interest rate?" She shared an eye-opener with me.

  
What this woman did every weekend was drive down to San Pedro to buy frozen shrimp from a whole-seller. She would then drive up to places like Fresno and Bakersfield, and sell them over the weekend in a refrigerated truck in a supermarket parking lot. 

For every $1,000 she spent on the shrimp, she made $400 in gross profit, more than enough to cover my measly split of $40 a month in interest. So I gave this woman my $1,000 investment from my student loans, and she is now a successful supermarket owner.

The lesson I learned here is that there is a big difference between cash flow and an interest rate. This is why she wasn't afraid to pay me a 4% interest rate, because she is going to make 400% profit in cash. She could make $1,600 a month, just from doing this, and only has to pay me back $40. A good debt is a debt that generates positive income. 

Bad debt, on the other hand, is the debt you are most used to hearing about. Bad debt is using your credit card for everyday purchases and not paying off the balance every month. That's how you go broke. 

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