Day 16: Good Debt vs. Bad Debt

Did I scare anyone off yesterday with my soapbox? I hope not. :) Today we’re going to narrow in on different kinds of debt. Distinguishing good debts from the bad ones can be very crucial in your personal wealth management. Good debt vs. bad debt — what’s the difference? Aren’t all debts created equally? Well… not necessarily. Debt overall is bad to have, but there are some “good debts” that are unavoidable, see more about credit cards use.

Here’s a little graphic to explain the difference:

Good Debt:

• Student Loans: College is expensive! But having a college degree, in my opinion, is definitely worth the cost. Student loans are considered good debt because of the value an education will provide in the long run.

• Home Mortgage: When was the last time you heard of someone buying a house in cash? Mortgages and investment property loans are categorized as good debt because you eventually gain equity on your home with the hope that you will turn a profit when you sell. You do not have to take us at our word. You can ask a professional like McGraw Property Management to learn more about property management and debt.

• Business Loan: Starting a business can be very expensive at first with a lot of upfront costs involved. A business loan provides the freedom to start the business with the back-up dollars to help keep it afloat in the first few years credit cards use. The goal is that eventually the business will turn a profit and the loan can be easily paid off within five years of the start (give or take, depending on the business). Lots of people I know are also looking for businesses for sale, I always tell them that Florida is the best place by far for a business and there are always great options for sale (see https://trufortebusinessgroup.com/naples-businesses-for-sale/ for some great Naples options). If you need vehicle loans for your business, you can visit Empower Federal Credit Union website. There are instances where a Private Equity Representation is needed to secure a loan so make sure to consult a financial or loan professional about your situation.

If you’re starting a business this year, look for a corporate formation team to seamlessly guide you throughout the whole process.

Bad Debt:

• Car Loans: Financing a car isn’t bad per say, but it is considered a bad debt because the car that you continue to pay interest on each month is rapidly depreciating every day you drive it. According to Edmunds, the minute you drive your new car off the lot, the value drops by about 20%. It is better to save up for a new used car than to finance a brand new car. (Note: Sometimes, you just can’t afford a car. J and I bought a new used car last year and ended up financing it because we needed one reliable car between us. We didn’t want to keep the debt on our records, though, so we ended up paying it off in 6 months. Read more here.)

• Credit Card Debt: Ahh the credit card. The seemingly “free money” that supports our lavish lifestyles. Credit card debt is bad because of the high interest and payment schedules arranged to maximize the costs for the consumer. We’re going to dive into credit cards more on Thursday. :)

• Store Credit Card Debt: It seems every department store I go into asks me if I want to open up a credit card. While it may seem like a good deal that day, beware that most store cards tend to have APRs of 20% or more, which will offset any money that you may save on your discounts. Avoid store credit card debt, above all else!

Now, keep in mind for each of these categories there may be exceptions. :)

What other debt am I missing? Have you ever considered your debt in terms of good or bad?

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This is day 16 of a 31 Day series on Financial Freedom. Click here to see all of the posts.

(images used in graphic: student loans, home, car, small business, shop, credit card)