Good Debt vs. Bad Debt
Believe it or not, not all debt is “bad.” You may be wondering how any debt could possibly be considered a good thing, but stick with us on this one. We’re going to give you some examples of good and bad debt, and explain why they’re labeled that way.
Good Debt: What is it?
Good debt adds value to your life and can help you earn more income. It can also be viewed as a long-term investment in your future. There are a few examples of good debt to help make this definition clearer:
- Education
College is expensive. Over 43 million students are loan borrowers. This debt is considered “good” because you can further your career with your degree(s) and likely earn more income over your lifetime. Education is a beneficial addition to your life and a tool to steer your success in the job market. Pick the right program for you to put yourself on the path to success so the debt pays off.
- Real Estate
Everyone knows how expensive it is to buy a home, and the fluctuating market can make it difficult to know when you’ll get the best deal. Buying a new home, living in it for several years, and then selling it for a profit can be beneficial to your finances. Even though you’ll owe money on the home throughout the time you live there, it’s a valuable investment for your future.
New Era saving tip: Do you have an empty room in your home or apartment? Renting out one of the rooms in your house is a way to make extra money to put toward your mortgage or rent.
- Business
Have you ever wanted to start your own company or do you already own a small business? Your motivation and hard work to be successful can drive your profits, so we think it goes without saying that the debt adds value in the long run. This business endeavor adds tremendous value because you’ll have a job, a company you can be proud of, and a sustainable form of income.
Bad Debt
Even some of the good debts have unfavorable qualities like risk, but some debts are justifiably “bad.” These include:
- Cars
We understand you need adequate transportation to safely arrive at work, school, or wherever your life takes you. New cars cost a lot of money no matter how “good” of a deal you manage to get. Some argue that used cars end up costing more because you buy an old car’s problems and may have to spend more just to fix it. You’ll need to assess your finances and determine what monthly payment you can afford. If you insist on buying a new vehicle, search for a loan with low interest or none at all. Just remember that a brand new car’s value depreciates the moment you drive it off the lot.
- Retail goods
Shopping sprees, buying new gadgets, and any retail or consumable goods can easily put a person in debt. These types of items don’t add any value to your life and selling them used usually doesn’t lend a favorable profit. If these items were bought on credit cards, then there’s a good chance you’re paying interest on them.
- Credit cards
Credit cards can be dangerous. They are categorized with bad debt because they help us purchase things we often don’t need. They can help you build credit if used wisely, but it’s critical to avoid impulse purchases and to keep the balance down or, ideally, at $0. Most people swipe their card even if they know they don’t have the money, which creates a burdensome financial situation. There are ways to take control of your credit card spending in order to stay on track.
Good Debt vs Bad Debt FAQs
How is good debt different from bad debt?
Good debt and bad debt are terms used to categorize different types of investments based on their potential benefits and drawbacks to your financial future. Good debt is used to finance investments or assets that can positively impact one’s financial future, while bad debt is incurred for non-essential and often short-term purchases with little or no potential for financial return.
In some cases, good debt can offer the additional benefit of tax deductibility, such as with mortgage interest or student loan interest. Bad debt is also often paired with higher interest rates compared to the lower, more manageable payments that many forms of good debt carry. Prioritizing good debt and minimizing bad debt can typically contribute to overall financial health and stability.
Are there forms of debt that don’t fit into the classifications of good or bad?
Yes, there are a couple of debts which are not easily categorized into good or bad debt which can include:
- Taking out a loan to make an investment with. This is most prominent with margin or leverage trading on the stock market or with cryptocurrency.
- Borrowing to pay off another debt such as with a consolidation loan. Promotional credit lines or low-interest loans designed to help consumers consolidate debt from other lenders are the most common forms of this type of debt.
Are you struggling with debt? We want you to help you so you can be one of our successful clients. Contact New Era Debt Solutions for a free consultation today so we can help you get back on the road to financial freedom.