Good Debt Vs Bad Debt

Everyone has debt in one way or another. However, most people do not know whether they have good debt or bad debt! It took me a long time to realize the difference between the two. Furthermore, when I found out what the difference was, I was already buried in debt. Many decisions I have made in my life put me at a disadvantage. That’s why we are going to look through the key differences between bad and good debt! We will also be listing off a couple of examples. therefore, you’ll be able to reflect and categorize the debt you currently have!

Contents

Good Debt	Bad Debt
Education	Cars
Real Estate	Clothes
Investments	Credit Cards

Good Debt

Many people will tell you different examples of good debt. However, good debt is anything that increases your network, appreciates or can add some sort of extra value. Lasting value is a key concept that investors look for when diving into debt that can be considered good.

 

Good debt gives you the opportunity to leverage whatever wealth you have in order to increase it in the long or short-term. A good term that is constantly thrown around which is the embodiment of this concept is “It Takes Money To Make Money.” However, here are some prime examples of what can be considered good debt.

Examples

 

College/University Education

I know you all saw this coming but it is one of the most common debts that can be considered “good”. Most people you speak with will tell you that education is the first step in being successful. The point of getting this education is because it can increase your earning potential.

 

This can be done through using your degree as an asset to move up within companies. Furthermore, it can factor when looking for a high paying job. Those who are well educated have a higher chance of being considered for prestigious jobs. Furthermore, opportunities tend to be less scarce to those who have completed university/college.

 

Depending on the profession that one goes into, they are able to get a full return on investment within a few years. However, as stated, this depends on the profession, demand for jobs, complexity and other factors. Tech & medical degrees, although expensive, usually pays itself off faster than a teaching or social work degree. However, having a degree does not mean that you will instantly become successful in the field you studied. It simply serves as a piece of paper that states that you are slightly more qualified than the other competition.

 

Real Estate

Real estate is one of the best good debts that you can have! For most people, this is the first wise investment that they make. The reason for this is because real estate almost always appreciates. The object of investing in real estate is that you can buy a house, live in it and turn a profit in the future. However, there are people who use it as an income stream.

 

They do this by buying a house or condo and renting it out to other people. This way the people there are essentially paying down the mortgage on the condo. Furthermore, there are instances where tenants pay more than the mortgage, leaving the landlord with extra money.

 

There are people who tend to buy houses, fix it up and sell it for a higher value. This happened with one of my old neighbors. They bought the house next to us, fixed up everything that needed to be done and sold it. However, they did live in a for a couple of months before this but they definitely turned a rather large profit.

 

Moving away from residential, there is money to be made within commercial real estate. Investors in this space tend to buy out commercial buildings. They then rent it out to various companies as they will need space for their offices.

 

Investments

Investments are also seen as good debt. They are things that you invest money into in order to receive a short or long-term gain. These investments can range from stocks, bonds and real estate to precious metals like gold. If you’re looking to generate a large amount of wealth, your best bet would be to go with long-term investing. However, these strategies, like everything in life, are never guaranteed. Some investments have lower risks than others.

 

This does not change the fact that there will always be a small risk. When investing, make sure to weigh out all the pros and cons. Definitely educate yourself through various readings so that you can lower that risk even more!

Bad Debt

Everyone has bad debt in one way or another. Its time we identify what they are. Bad debts are things that depreciate in value over-time. They do not particularly add to your network and lose value. These items do not generate any sort of income. However, not all of them are bad because some help you generate income indirectly. That being said, these debts aren’t necessarily bad either and some are even essential to everyday life!

 

Examples

 

Cars

If the first thought in your head was cars, then you hit the nail on the head! Cars are one of the first expensive depreciating assets or bad debt that one can buy. Everyone has heard it before but once you buy a car it loses its value once it’s driven.

 

You can buy a car new and if you try to sell it a year later, it will sell for considerably less. However, resale value depends on the condition and make of the car. Some cars resell for more than others such as; Mercedes, Audi, and Lexus. Not only that, you have other payments that are attached to the car like insurance and maintenance.

 

Although they depreciate, they do serve their purpose. For a lot of people, a car is necessary for their life. Using my personal experience, I needed a car to commute to work and school since the bus would be too difficult to use due to the distance. However, my mistake was buying a sports car at 22 that would end up costing me an arm and a leg on maintenance.

 

What I should have done was buy a more affordable, low maintenance, used car. It would have cost me less money in the long run and is more practical. This is one bad debt that indirectly contributes to generating income. This because they can take you to your job more efficiently, which saves you time and earns you money.

 

Clothes & Other Goods

Even though clothes are definitely a need. Some people go out and spend an unnecessary amount of money on clothes. It cost much less to make these articles of clothing that it does to buy them. I have met people who have shopping addictions, to the point that they are thrown into debt because of this.

 

Once you wear clothes, the value (monetary) of that particular clothing is almost immediately gone. People generally tend to purchase clothing and other items on credit cards, especially if they’re buying a lot. Furthermore, most of these people don’t pay their credit card back in full when the time comes.

 

Being charged interest on something that costs less than half of its retail is not a wise investment. However, there is a time and place for making these purchases. Buying business attire or clothes because you’re running out of outfits that fit are not a bad investment. Just be wary of how much clothes cost and if they are really a necessity in your current situation.

 

Credit Cards

Probably the worst debt you can have (in my personal opinion). The reason for this is because a majority of people are extremely uneducated on how they work. People forget that this isn’t their money and it comes at a cost. However, if you can utilize a credit card correctly, then it is an amazing tool.

 

Credit cards should not be used unless you have money readily available to pay it off. Often times people will purchase an item and pay minimum payments for months. This result in the consumer paying interest on that item, effectively paying extra for that item.

 

It is a common misconception that keeping a balance and paying it off slowly is good for your credit score. This could not be further from the truth. All this does is charge you interest on something that may or may not has been a necessity! On top of all these, credit card interest rates are usually astronomically high. Typical credit cards in Canada have an interest rate of 19.99%! Paying 19.99% yearly on an item is a crazy amount and should be avoided at all costs.

 

Conclude

Paying for everything in pure cash is difficult and absolutely avoiding all bad debts can be equally as hard. Purchase things when in need and make educated decisions with any investment. If you spend your money in moderation and don’t go overboard, you will be fine!