I won’t lie…having a never-ending supply of cash that would allow me to buy whatever I wanted to would be lovely. It would definitely be better than incurring debt. But until and unless you find a way to have a never-ending supply of cash, debt is likely a part of your life. So how can you tell “good debt” from “bad debt”?
To put it simply, bad debt is any debt you incur when buying something that will lose value. Worse debt (or really bad debt) is debt incurred when purchasing something consumable (meaning it will have NO further value). This seems logical, right? You with me?
If bad debt is buying something that loses value, then it stands to reason that good debt involves purchasing something that will gain, retain, or create value. A home mortgage is a prime example of good debt.
Many people assume bad debts because “that’s just how it is”. But that’s not necessarily how it has to be. For example…vehicles. Many Americans buy cars via automobile loans. But a new or late-model car loses value the moment you drive it off the lot, and it continues to lose value with every mile it travels. So why incur bad debt for this? Well, for many a vehicle is simple a necessity and a loan is the only means they have available to obtain it. But a large percentage of Americans purchase more car then they really need or can afford. It’s important, when facing bad debt, to keep that debt in check. Purchase what you need, with a plan to pay it off as quickly as you can.
Can bad debt turn into good debt? Yes! Let’s say you purchase a vehicle by taking out a loan for a portion of the cost- that’s bad debt. But if the vehicle is a hybrid or electric vehicle that typically has a high resale value and saves you a substantial amount of money on gasoline, your bad debt could turn into good debt.
There are exceptions. For example…what about student loans? Your education is only used by YOU and cannot be re-sold. So is that bad debt? Not exactly. As I mentioned before, if a debt creates value, then it can be considered good debt. A student loan definitely falls into this category, as higher education creates increased earning potential.
We all want to be debt-free. That takes time. Until that time, try to get a handle on which kind of debt you are incurring.