What's the difference between Good debt and bad debt?

I will never forget when I had graduated from the University of Southern California and had a job offer in Burbank, CA. I was applying for various apartments. This one elderly lady looked at my credit profile and screamed "You're never gonna get out of debt!"


Well, all I have to say is:

I never want to get out of debt... good debt that is

So what is good debt? Good debt is money that you borrowed that you put to use so that it pays you more than you owe. For example, let's say you sell ice cold water at the beach. You charge $1.00 per bottle but because you buy from the local store, you pay 50 cents per bottle. So what do you do? You go into debt by making a wholesale purchase for 10 cents a bottle thereby, increasing your profit margin considerably. 

Not really the best example from the standpoint of financial freedom though - because you are still working to sell water. So how do you fix that? You hire someone and agree to pay them 25 cents for each bottle sold. You still are making more profit than when you were selling the water yourself and now you are earning passively. Which means you can now hire another person, to work another beach and double your passive income, etc, etc.

Bad debt is a rough road

Bad debt is debt that was used to pay for something that is not paying you. Some bad debt is flashy, like a new sports car. At other times, bad debt is a lifesaver. Like when I was terminated from my job without notice, I am grateful that Lending Club approved me for 35k. I had plans for that 35k to be the down payment on a cashflow-positive rental unit, but instead I spent the cold winter indoors taking care of basic living expenses while I frantically searched for another J.O.B. And as is typical of me, when I get financially desperate I spend more money trying to make money than I actually make.

Revolving debt is the worst type of bad debt

Revolving debt, or credit card debt, is debt where the amount owed is compounded daily. You read that right - daily. Compare this with an installment loan where the payment is fixed but you don't experience daily compounding against you, the borrower.

How to get out of bad debt?

I feel that my article on managing debt is central to this site. It is an article designed to get a person on the path to financial freedom.