Good debts and bad debts

In banking and finance, good debt and bad debt are viewed from the context of performing and non-performing loans whether the loan is serviced as and when due or not.

From a cash flow perspective, good debts are debts incurred on items that pay for themselves while bad debts are debts incurred on items you have to pay for. Both may be performing loans but good debt makes you richer while bad debt makes you poorer.

When starting a business, the temptation is to start big and make assumptions that the items you purchase will ultimately pay for themselves. The rate of failure of startups has shown that the assumption is often wrong. Your assumptions always look good on paper. You are better off testing them first before risking your entire seed capital on it.

When making buying decisions, we often decide emotionally and justify with logic later. If we really want something, we have a way of persuading ourselves that we are making the right decision. Having the money makes it more difficult to think logically - you don’t need a third party to scrutinize your idea.

Starting small gives you the opportunity to test what works and what does not, without committing too much of your funds. At the end of the day, you are better off when the things you purchased pay for themselves rather than adding another overhead you are not yet ready for.

UsiereUko is author of Practical Steps to Financial Freedom & Independence and can be reached at usiere@gmail.com, www. financialfreedominspiration.com