Understanding Good Debt Vs. Bad Debt
Before we can begin running a business of prosperity and abundance, we must learn as much as we can about debt and the effects it has on us. Many people think that all debt is bad debt and that it should be avoided at all costs or they should pay it off as fast as they can. This is a common misconception and should be rectified immediately. There are two types of debt. There’s good debt and then there’s bad debt. Being able to differentiate between the two is what being smarter about your money is all about.
Bad Debt or consumer debt is the debt you acquired to buy things that will eventually lose value. It doesn’t have an obvious way of helping your finances. Good Debt is debt that’s used to buys things that will increase in value over time. Both play important roles in creating wealth however one is more important than the other. It is imperative to do away with bad debt. Bad Debt only takes up more of your money and adds stress and worry leaving you no space to focus on your goals. Good Debt has a way of adding to your goals by creating opportunities to create more money.
Good Debt
When you borrow money for something that is going to generate more money for you this will prove beneficial in the end. Therefore, real estate loans, home mortgages or business loans are all sources of Good Debt. They will over time create a way to add to your finances rather than take away from them.
Refinancing your home to get rid of the high interest rate on your current home loan is good debt. It saves you money and in some instances will give you some extra cash upfront that you will be able to use for investing or enhancing your home, which may cause it to appreciate in value. Borrowing money for the purchase of a new home is another example of Good Debt. Over time your home purchase will produce equity, which in turn adds to your net worth.
Student loans are also considered Good Debt. An education affords you the opportunity to obtain a job that will increase your earning potential. They even offer deferments if ever there is a financial circumstance that keeps you from paying accordingly. Good debt is a way of making your money work for you. If ever you are going to get back more than what you borrowed, you are in good debt.
Bad Debt
When you buy something that instantly loses value it has no benefit to you. If your purchase has no promise of increasing in value it is useless. A lot of our bad debt is obtained by our desires for material things. We may want the newest car or the latest fashion; all of this is acceptable only after we have created a flow of income to sustain our lifestyle. We often overlook the effects of purchasing items with our credit cards. When we use our credit cards for purchases and are not prepared to pay the balance in full before the due date we are actually increasing the cost of our purchase. Every month you make the minimum payment on your credit cards an interest is added to your bill increasing what you originally paid for the item. Therefore if you opened an account with a store for the 10% or so they offer off of your initial purchase you will eventually pay it all back, if not more in interest.
Bad Debt can be tricky; because we cannot physically see the effects it has on our finances. We just see to it that we pay our balances on time so that we don’t get a late fee but if you took the time to add up all of the interest that’s added on to your balance, it would prove costly and you would be able to see how you are wasting your money.
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Carnival of Personal Finance No. 188: The Jane Austen Edition…
Welcome to the 188th Carnival of Personal Finance! Our theme for this week’s edition is Jane Austen, as I am a admirer of both her novels and the films based on her novels, which are graced throughout with witty commentary on society — and in …
[...] Personal Finance Ology presents Understanding Good Debt Vs. Bad Debt [...]
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