Good debt vs Bad debt – How does your debt stack up?
What is the difference between Good Debt vs Bad Debt?
Debt comes in many different forms. Credit cards, mortgage loans, hire purchase loans, store cards, personal loans for things such as cars, holidays, renovations for example. But did you know that there is Good Debt vs Bad Debt?
The next time you borrow money to pay for something, ask yourself “Is this considered to be good debt vs bad debt?”
So what is the difference?
It never occurred to me as I was going through the cycles of owning debt to ask myself whether my purchase was good debt vs bad debt. It wasn’t until recently when I started considering what my retirement is looking like that I learnt the difference in Good Debt vs Bad Debt.
I know I learnt this a little late in life. But don’t you leave it this late to figure it out. So I am telling you now so you don’t make the same mistakes we did by clocking up a shitload of bad debt over a number of credit cards and loans.
What is Good Debt
Good debt is considered to be an investment that may generate long-term income or will grow in value over time. These debts or loans generally have a low-interest rate. A mortgage for a home or a rental investment is the perfect example of Good Debt.
They say a student loan is considered to be a good debt. But with the high cost of student loans compared to how many students actually see out their degree and profession, I would not be so sure.
Yes, a University degree is an investment in your future and therefore increases your employment worth. Therefore should fall within the category of “Good Debt”. However, only if you choose to follow through with your chosen profession.
I know of people who have clocked up tens of thousands in student loans, to then give up on their degree or change their mind.
I’ve had ex-university graduates who were thousands of dollars in debt, sitting next to me in the office doing the same job as I was and getting paid less because I had been there longer. In this case, I would consider student debt to be a bad debt.
What is Bad Debt
Bad debt is considered to be a purchase where it does not generate you an income, and nor will it grow in value. It is usually the complete opposite and will de-value the instant you get it home. The debt will usually have a high-interest rate such as credit cards.
We should all try to avoid Bad Debt at all costs. Generally, if you can’t afford to pay for it up front, and it is considered to be a Bad Debt item, then you don’t really need it. If you really really want this item, then consider setting up a separate bank account and save for it instead. You will find 9 times out of 10 by the time you have saved up for it you probably don’t want it anymore anyway:)
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Your next purchase
So next time you want to buy something on credit, ask yourself “Will this be considered as a good debt vs bad debt?”
If the answer is bad debt, then you should not get it!
Add your words of wisdom
Do you have any words of wisdom for people reading this on why to avoid bad debt at all cost? Share your words of wisdom with us in the Comments Box below.