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It has been ingrained in us that “debt” is a bad word and should be avoided at all costs. However, paradoxically, there are some forms of debt that can help you make more money in the long run, not less. If you want to make better financial decisions, you should learn the difference between good and bad debt.
What is good debt?
Understanding good debt can be done by understanding the expression “you need to lose money to make money.” Good debt is any form of debt that is going to allow you to move your life forward in a positive way. Examples of this include:
- Education: As student loans start stacking up, it can be hard to see the light at the end of the tunnel. However, having a degree increases your earning potential and usually makes for an easier time finding employment. There are some degrees, though, that do not promise returns in terms of compensation. Choice of major and degree type are important to consider when taking on larger loans.
- Your Business: Starting a business is a tremendous feat– one that requires you to borrow quite a lot of money. If it succeeds, it can be an amazing investment that supports your family. And if you do decide to sell, it may make you a profit!
- Your Home: Taking on a mortgage is a very large debt. However, every dollar you pay towards a mortgage, you’ll earn back if you ever decide to sell your home. You may also decide to utilize the home as a rental property that generates income passively through tenants.
What is bad debt?
On the flip side, bad debt is borrowing money for “depreciating assets.” These are things that do not bring in any income and lose value over time. Examples of this include:
- Cars: In most places, it is very hard to live without a car. However, as soon as you drive a car off the lot, it loses value. If you are purchasing a vehicle, you want to make sure you take out a loan with little to no interest. You are still borrowing for a depreciating asset, but at least you are not stuck with incredibly high interest.
- Clothes and other miscellaneous items: Most of the clothes we purchase are hardly worth what we pay for them. However, we do need clothes– and food, and furniture, etc. But it is not recommended to put yourself in debt to purchase them. If you need to use a credit card, you should stay on time with payments, otherwise, just use cash.
Ultimately, debt is debt. Whether it’s good or bad, you need to make sure that you are staying consistent with payments to remain in good standing.
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