Good Debt vs. Bad Debt: What's the Best Way to Think About Debt?
Debt can be a scary word for a lot of people. Most of the time, when we hear "debt", we think of something negative. But did you know that not all debt is the same? Actually, there's a big difference between "good debt" and "bad debt".
Knowing this difference is important for your financial health. Making smart choices about debt can help you grow and become more successful. In this blog post, we'll talk about good debt and bad debt, give you some examples, and help you figure out how to use debt to your advantage.
What's Good Debt? Investing in Your Future
Although our stance is that in most cases you should avoid going into debt to make a purchase, there are some cases when it does make sense to do so. Good debt is the kind of debt that you can think of as an investment in your future. You often use it to pay for things that could make you more money afterward, help you grow your wealth, or improve your financial situation in the long run.
Some examples of good debt are student loans for college, a mortgage for a house, and business loans to help your company grow. The most important thing about good debt is that it has a clear reason and is expected to give you a return on investment over time.
Student Loans: Education is an Investment
One common example of good debt is student loans to pay for college or other higher education. Even though it might feel overwhelming to take out loans for school, investing in your education can lead to better job opportunities and more money in the future. Having a college degree or specialized training can make it easier to get a job and stand out in the job market. When you're thinking about taking out student loans, it's important to think about whether the investment will be worth it, like if you'll be able to get a higher-paying job after you graduate.
We’ll add a note here—although in general student loans can be seen as good debt, you have to do your own research on whether or not the topic(s) you’re studying will teach you skills that are in demand. If businesses aren’t paying for what you’re going to learn, think carefully about the cost of the debt you’ll be paying.
Mortgages: Building Wealth with Home Equity
Another example of good debt is a mortgage to buy a house. When you own a home, you can build up equity as you pay off the mortgage and as the property value goes up. Owning real estate can also give you passive income if you decide to rent out part of the property. Even though a mortgage is a big commitment, it can give you stability and a sense of ownership that you might not get from renting.
Business Credit: Fuel for Your Entrepreneurial Dreams
Did you know that business credit can also be considered good debt? Even if you don't have a business yet, learning about this form of financing can help you turn your awesome business idea into reality. Business credit is basically the credit that your business can get from lenders or suppliers, separate from your personal credit. It helps you get loans, and lines of credit, or even negotiate better payment terms with vendors, all in the name of growing your business.
Starting a business might feel like a big leap, but having access to business credit can make it a lot easier. By building good credit for your business, you'll have more financing options to help your company grow and succeed. Plus, keeping your business credit separate from your personal credit means you're protecting your own finances, too. So, if you've got an entrepreneurial dream waiting to take flight, consider exploring business credit (another form of good debt) to help you make it happen.
Watch Out for Bad Debt: Know the Risks
Now let's talk about bad debt. Unlike good debt, bad debt doesn't help you reach your long-term financial goals and might even make it harder for you to reach them. Bad debt usually comes with high-interest rates, lots of fees, and no clear benefits. Some examples of bad debt are credit card debt from spending on things you don't need, payday loans with high-interest rates, and borrowing money for things that lose value over time, like cars.
Credit Card Debt: Understanding The Price of Convenience
Credit card debt can get out of control really quickly if you're not careful. Even though credit cards make it easy to buy things and give you flexibility, carrying a balance from month to month can lead to high-interest charges that add up over time. Using credit cards to buy things you don't need or can't afford can lead to a lot of debt that doesn't give you any real benefits. To stay out of credit card debt, try to avoid using credit cards unless under extreme emergencies, pay off your current balance every month, and keep track of your spending.
Payday Loans: A Dangerous Debt Trap
Payday loans are short-term loans that people sometimes use to cover emergency expenses until their next paycheck. Even though payday loans might seem like a quick fix, they usually have very high-interest rates and fees that can lead to a dangerous cycle of debt. If you can't pay back the loan on time, you might end up taking out more loans to cover the original one, which can keep you trapped in debt. Because payday loans are so risky and expensive, it's best to look for other financial solutions and try to avoid this kind of debt whenever you can.
So, Is There Such a Thing as Good Debt?
The answer is yes, there's such a thing as good debt! Good debt is any debt that you use to invest in your future, like starting a business, dealing with a critical emergency, or paying for education. You just need to make sure you’re not mistaking good debt for bad debt. Knowing the difference between good debt and bad debt is essential for making smart financial decisions that'll set you up for success.
Now You Know The Difference
When you're thinking about taking on debt, consider whether it'll help you reach your long-term goals and improve your financial situation. The key is to be smart about how you use debt and always think about whether it's helping or hurting your financial future. By understanding the difference between good and bad debt, you can make better decisions and set yourself up for success in your personal and professional life.
If you found this article helpful, make sure to share it with friends and family, and don't forget to keep learning about personal finance so you can make the most of your money and reach your financial goals.