Good Debt vs. Bad Debt

It’s almost impossible to get through life without any form of debt. Student loan debt, mortgages, car loan, credit card loans, you name it. Unless you’re born rich, debt is going to be an important part of your life. Generally, debt is often seen as bad and something to be avoided. Not many people know that there are other kinds of debt which are actually “good”.

The Good Debt

What is good debt? Good debt is debt that helps you generate income. This is debt that increases your net worth or helps you invest to grow your money. Here are examples of good debt:

  • College Debt - Better education means a higher probability of good employment. Highly educated workers often have better paying jobs and an easier time finding new opportunities for work.

Better education = better paying jobs.

  • Mortgage - Experts say mortgages are the best kind of good debt. Real estate appreciates 3% a year, so if you buy a home worth $250,000 today, this investment can grow to $700,000 in 30 years.
  • Small Business Ownership - Debt to start a small business is also a form of good debt. With your own business, you don’t have to rely on a third-party (company or boss) to give you a paycheck. Once your business grows you can pay off your debts and earn a new sources of income which can potentially help you quit your full-time job.

Starting your own business can significantly increase your incomes in the future.

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    Auto Loan - If the vehicle is going to be used for business, an auto loan can be good debt. However, unlike property and homes, vans, cars, & trucks lose value over time. So it’s important to consider whether or not you really need the vehicle.

The Bad Debt

Now that you know what good debt is, let’s take a look at bad debt. What it is and why you should avoid it. Bad debt is basically any debt that lowers your net worth and doesn’t have any guarantee that your investment will grow in the future. Here are a few examples of bad debt:

Credit card debt can seriously jeopardize your finances.

  • Credit card debt - The more you overspend, the more credit card debt will jeopardize your finances. Credit cards are often used to buy something we want rather than need (ex. Expensive clothes, jewelry, bags).
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    Expensive vacations - Thinking of getting a loan for your dream trip? It’s probably wiser to just save up for it or opt for a less expensive one one that may not be as hard on your wallet.
  • Brand new car - Just because your neighbour bought a brand new Lexus doesn’t mean you should too. Cars lose value over time and they can also put your finances at risk if you can’t make the payments.

Cars lose value over time and they can put your finances at risk.

Helpful Advice To Avoid Bad Debt

Avoiding bad debt is a good step towards smart money management. 

Here are a few things you can do to avoid bad debt:

  • 1
    Don’t buy things just because they’re on sale. Only buy what you need.
  • 2
    Learn to say no sometimes. Don’t say you’ll do it if you can’t afford it.
  • 3
    Make a shopping list whenever you go to the grocery store.
  • 4
    Always bring cash so you don’t get tempted to use your credit.
  • 5
    Build an emergency fund as soon as you start earning money!
  • 6
    Think twice about purchasing things online.

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