A quick guide to good debt versus bad debt
Something I learnt very early on was that debts can be good and bad.
Some people will say a debt is a debt and as long as you have it, it is costing you money you would otherwise be saving.
This is not true, debts can range from good to bad to in between.
Also, what is the point of saving if we don’t have a way to leverage it to get what we want? It would be pretty hard to buy a house outright from savings, it would take years to save over $500,000!
What is good debt?
Good debts are ones that are used to buy assets that will increase in value. Pretty simple isn’t it?
If it wasn’t for mortgages or home loans, many people would never be able to buy their first home and use it to leverage off for future property purchases.
A house for instance is a good debt as it is an asset that as a general rule of thumb will increase in value over time.
What is bad debt?
A bad debt is quite simply a purchase on credit that will not increase in value.
For instance, a car purchase is actually a bad debt. Not many people will be able to make money off their car purchases which means it is draining your money and costing you cash, while not actually increasing in value. Just driving your car out of the showroom can drop its value by significant amounts.
Although a car is a bad debt, it is often a necessity and in turn cannot be overlooked. The trick is to be clever with bad debts and understand they are not helping you and aim to minimise your interest paid to save on overall costs for acquiring the depreciating asset.
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