Good Debt VS Bad Debt: What’s the Difference?
In a perfect world, we’d all be living debt free. Sadly, being in debt is something most Americans are familiar with. As we know, debt doesn’t just disappear, and there is no magic glove to wave it away. Once you’re in debt, you’re in for the long haul. All you can do is hope that the loan is working for you.
Here’s how to ensure that any future loans you take end up producing good debt rather than the bad kind.
Adding Debt: When it Makes Sense
There are times in life when adding on debt makes sense. Think back to your first job fresh out of college. Would you have qualified for that role without your college degree?
Either way, someone with a BA makes $500 a week more than someone with just a highschool diploma. In other words, taking out a loan for college is a good example.
One way to think of good debt is in terms of return on investment (ROI). If you take out a loan and use it towards something that will boost your earning potential long-term—that’s good debt.
It isn’t just student loan debt that’s considered good. Debt from a mortgage loan, or a small business loan are also good. A mortgage loan is good because owning property is an excellent investment.
Just think: the average sales price of a home has jumped over $124,000 in one year.
A small business loan is on the good side of the debt ledger too, because it can boost your wealth. But like all things in life, enjoy good debt in moderation. Too much of a good thing can lead to…well, you know.
[Key Takeaway: If your loan pays for something that will boost your earnings and/or wealth in the long-term, this is considered a good debt.]
Keeping Your Debt Good & Avoiding Bad Debt
Good debt can spiral quickly into bad debt. But there are ways to keep this from happening.
How to Keep Good Debt From Going to the Dark Side
• Keep good debt to a minimum.
• Too much good debt can sour fast.
• Don’t pay off debt with credit cards.
(Using the Ultimate Plastic Debt Creator to pay off debt is a bad idea.)
• Make your payments on-time.
• One late or missed payment can snowball into an avalanche of overtures.
• Don’t take on too much good debt.
• Too much of a good thing can turn bad.
Quick Tips to Avoid Bad Debt
• Evaluate the ROI.
• If it isn't going to make you money in some way, don’t do it.
• Is it a want or a need?
Everyone wants a new car. They smell awesome and look great. You don’t need a new car.
Key Takeaways
Think long-term. To avoid anxiety, one method is to “keep it in the now.” To avoid bad debt, think of the future.
For example, that new fall ensemble you purchased on credit — not good.
Avoid impulse buys. Relax, take your time. Think long-term. Are those skinny jeans even going to fit in five years? My sources say NO.
Wrapping Up
Remember that all debt is not created equal; just as it’s not always a bad thing to have. But before you take on any additional debt, make sure that the loan you take works for you and not the other way around.