Good Debt vs Bad Debt: How to Tell the Difference and Why It Matters

There are a lot of talks these days about good debt vs bad debt. But what does that really mean? And why should you care? In this blog post, we will discuss the difference between good debt and bad debt, and why it matters for your financial future. We will also provide some examples to help illustrate the point. So read on to learn more!

What is good debt?

Good debt is defined as money that is borrowed for a specific purpose that will generate income or appreciate in value over time. An example of good debt would be taking out a loan to buy a rental property. The hope is that the rental property will increase in value over time and also generate income through rent payments. Another example of good debt would be taking out a loan to start a business. The hope is that the business will be successful and generate enough income to repay the loan and also provide a good return on investment.

What is bad debt?

Bad debt is defined as money that is borrowed for a purpose that will not generate income or appreciate in value over time. An example of bad debt would be taking out a loan to finance a vacation. The money borrowed will need to be repaid with interest, but the vacation will not generate any income or appreciate in value. Another example of bad debt would be taking out a loan to buy a new car. Cars are a depreciating asset, so over time, the value of the car will go down, not up. This means that the money borrowed to finance the car will need to be repaid with interest, but there will be no return on investment.

Special consideration:

Some debts can be good debt or bad debt depending on the circumstances. For example, student loans can be good debt if the education received will lead to a good-paying job. However, student loans can be bad debt if the education received does not lead to a good-paying job.

So why does good debt vs bad debt matter?

It matters because good debt can help you build wealth over time, while bad debt can only make you poorer. If you are only making minimum payments on your debts, then the interest charges will eat away at your wealth. On the other hand, if you are investing in assets that generate income or appreciate in value, then your good debt can help you build wealth over time.

What to do to avoid bad debt?

To avoid bad debt, only borrow money for a purpose that will generate income or appreciate in value over time. If you are not sure whether an expense will generate income or appreciate in value, then it is best to save up the money and pay cash.

Hopefully, this has helped to clear up the difference between good debt and bad debt. Remember, good debt can help you build wealth while bad debt will only make you poorer. So be careful with your borrowing and only take on good debt that you are confident you can repay.

Do you have any good debt or bad debt stories to share? We would love to hear from you in the comments below!

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