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Good Debt vs Bad Debt: What is the Difference?
Hey guys, welcome back to Leadership Stack Live. We only have a couple of questions, but if you do have questions you forgot to ask, you want to also ask your business consulting questions, or leadership questions, management questions. You can go to the link that’s from.sean.si/discord. Once you are able to sign up there, you will see that there’s an Ask Anything Questions channel, and that’s where you post the question that you want to ask me. I answer questions only from the discord community and that’s because I value people who are in the community and I want them to get a ton of value from what I’m doing.
When do you consider that it is a good debt? How do you manage it?
It is a good debt, if you are going to use the debt for assets, money-making assets. So one of the investments that we have is in the agriculture business. And there is a certain loan that we call crop loan. When you have a crop loan from the government, you have a certain amount of interest, sometimes it’s 6% and you pay it in two years time. So meaning, per two years that’s 6%. Meaning, per year, strictly speaking, that’s only 3%. But you have to pay it with the principal and interest, of course, after two years.
So if you’re able to pay it, it’s like you only had 3% interest. And that for me is fantastic if you’re going to use your capital, the type of capital that you didn’t loan, meaning, your cash-on-hand capital, is elsewhere. You’re going to use it to buy another business, start another business, or buy real estate and rent it out. And then use the bank’s money, meaning, your loan to finance your other business or your agriculture business, that for me is a good kind of debt.
Or for example, same with real estate, if you’re going to loan from the bank and the interest is much smaller than the amount of money or revenue that you’re going to get from the rent. For example, if you’re going to rent out the property, then it makes sense to loan it from the bank. That way, you lessen your risk because you’re not risking your own capital, if it’s all you have, or if it’s a very big amount of what you have, cash on hand, then better to borrow from the bank. That is my opinion. That is a good kind of debt.
A bad kind of debt is if you’re going to use the debt for a liability. Luxuries, car, or house that you don’t need, houses that you’re not going to live in and you just want it for rest. That for me in my opinion is a bad kind of debt. So anything that is not an asset, not a money making asset, and you take out a loan or debt for that, I think that’s a bad kind of debt and you should get out of it as quickly as possible.
What is your strategy on getting out of bad debt?
First and foremost, don’t do it. Personally, I haven’t gotten into bad debt. I make sure that if I’m going to loan from the bank for a, strictly speaking, not an asset, like for example, a vehicle that I want to purchase, I make sure that I have cash on hand to pay it and I won’t be at a disadvantage when I pay it cash. Meaning, I have excess cash and I could pay it outright, but I’d rather loan from the bank because it’s good relationship with my bank manager and also, it helps with my credit. So that is strictly speaking, not a bad debt. But I did take a loan, so that is debt for something that’s not a money-making asset.
Getting out of bad debt, strategies, you have to negotiate with a debtor. You have to negotiate from the people or the bank that you ask money from. You have to have a debt payment plan or debt free payment plan, if you fail to pay the debt for the first time. But definitely you have to get out the debt as quickly as possible. There is no other way.
From Jaz, question is: How do you separate personal from business finances?
You just have to have a personal banking account. So you usually have your business banking account, which is an operating account. Oftentimes, when you’re already registered with the SCC, or if you’re not, if you’re small to medium business, DTI, that’s all right. You still should have a banking account just for your business. Maybe it’s named after you. That’s okay. But it’s a separate bank account, it’s just like a normal bank account, but it’s just separate from your personal account. That’s the easiest way to split it.
And when clients pay you, put it all in that business banking account. And then when you need to withdraw money from that business banking account to your personal bank account, then you would be able to backtrack your transactions, how much you withdrew, how much you spend personally. Also, you should decide how much salary you’re going to pay yourself early on.
I do have a podcast episode with Ms. Tracy Bissett, she’s from Canada. You might want to check it out. We discussed about how much you should be yourself as an entrepreneur. And that episode is out on YouTube and Spotify already, actually. If you’re following us on Spotify and YouTube, simply search for Tracy Bissett, and you’ll see the episode already that says How Much You Should Pay Yourself As An Entrepreneur and tune-in.
Make sure that you’re not spending more than what you’re making. A lot of businesses fail not because of the economy. Although right now a lot of the businesses did succumb to the pandemic, which is sadly about the economy. But during the normal times before the pandemic, a lot of business businesses fail because of behavior, mindset. It’s because they spend more than what they make. It’s a behavioral problem. And a lot of entrepreneurs, kumita lang, gagastusin na. That’s the problem. You cannot have that kind of mindset. You should be able to save.
And when you separate your personal and business banking account, that helps you to save, and that helps you to not touch the business banking income. Especially if you have people who follow you, especially if you have people who are partnered with you, maybe. I do have my ExeCom, we are in an incorporated entity, SEO hacker, so it does help a lot that I don’t touch the corporate account as often as I need to. And if I do withdraw from that to transfer it to my personal account, I leave notes on what I’m going to be using it for. So usually it’s also for business expenses like credit card, because we run ads and Facebook and Google, et cetera.
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