Concept
Good debt and bad debt
Good debt and bad debt is Kiyosaki's distinction between borrowing that buys an asset whose income covers the payments and more, and borrowing for things that only cost money, with the warning, often understated in his books, that even good debt turns bad when income falls or rates rise.
Kiyosaki argues that debt itself is not the enemy: a loan used to buy a property whose rent exceeds the loan payment and the costs puts money in your pocket every month, while a loan for a car, a holiday or a phone takes money out. He calls the first good debt and the second bad debt, and he is right that the two are very different. The difficulty is in the word "exceeds". A rental that pays its loan today may not if the tenant leaves, repairs arrive, or a variable rate climbs. High-interest environments, which Turkey has seen often, make the margin thin or negative, and leverage multiplies losses as well as gains. Kiyosaki's own enthusiasm for borrowing heavily is one of his most criticised positions. A careful version keeps the distinction and adds rules: borrow only for assets with positive cash flow under pessimistic assumptions, keep a reserve that covers several months of payments, and never treat consumer debt as anything but bad.
A real-life example
Serkan, an electrician in Antalya, wants to borrow to buy a small flat to rent to tourists. He calculates that rent would cover the loan in a good season. Then he runs a bad year: three empty months, one large repair and a higher rate. The flat would cost him money every month. He waits, pays off his car loan first and saves a larger down payment so the numbers work even in the bad case.
How to use it
- 1Sort your current debts into those that pay for themselves and those that only cost money.
- 2For any new loan, test the cash flow under pessimistic assumptions: vacancy, repairs, higher rates.
- 3Keep a reserve that covers several months of payments before taking on any debt for an asset.