Good vs. Bad Debt
While there’s the saying “no debt is good debt”, sometimes consequential things in life will require you to take on some debt. Luckily, good debt is a thing. We break it down here.
| Good Debt |
Good Debt is kind of like short-term-pain-long-term-gain. It means taking on debt that may be a big expense but ultimately, has the potential to increase your overall future net worth. (aka. you gotta spend money to make money).
Examples of good debt:
🎓 Student Loans: By taking out a loan to go to college/graduate school, you are assuming the degree boosts your future earning potential.
🏡 Mortgage: Taking a loan to buy a home has two main reasons it’s considered good debt:
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You need a roof over your head so you may as well be paying a mortgage instead of rent and ultimately own the asset
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Housing prices historically have an upward trend so your “investment” in the property usually pays off (but remember: there will always be peaks and valleys; no matter your age you’ll remember the 2008 Housing Crisis dominated the headlines for years)
🏢 Business Loan: Taking out a small business loan gives you cash to invest in your company to make it grow. Hopefully it results in profits that not only pay back the loan but earns you more money faster than would’ve been possible without the loan.
| Bad Debt |
Bad Debt is basically short term pain that grows into bigger pain. This debt in no way actually helps you, it just drains your bank account ☹️
Examples of bad debt:
🚗 Car Loans: Yes, you need transportation, but, the moment a car leaves the dealership, it’s already lost some value. Instead of taking out a loan to buy a car, going for a used car that you can pay for in cash is a better decision.
💳 Credit Card Debt: Taking advantage of cash back and travel perks on a credit card is super savvy - if you have no trouble paying down to $0 your spending each month. When you cannot, and start to leave a bit unpaid each month, this accumulation is bad debt.
Why? Because of the high interest rates that you pay if you don’t pay down your monthly bill in full and on time. So, if you really need to buy a big ticket item, a small personal loan from your bank is smarter than using your credit card (the bank loan’s interest rate is less painful than the credit card’s).