Difference Between Good Debt & Bad Debt With Examples

Debt is never a good thing. But there are different kinds of debt, and some kinds of debt can be worse than others. In this blog , we'll look at the difference between good debt and bad debt -- and what makes each kind so risky in the first place! Yesterday I wrote about 3 money mistakes I made in my twenties. Taking bad debt was one of the mistakes I mentioned there. This blog is an extension of that topic.

Money You Invest In Yourself & Your Future

Good debt is the money you invest in yourself or to safeguard your future.

• Investment in Yourself: Education, personal development, and skills training are all good examples of investments in yourself.
• Investment in Your Future: Buying Life or Medical insurance or investment in your retirement or emergency fund.

Money You Invest To Create or Buy Assets

The money you can use for assets that increase in value over time.

• Investment In Assets: Buying real estate and other assets (stocks, crypto etc.) that will give you good returns in 5-10 years.
• Investment In Your Business: If you start a business with borrowed money and grow it until it's profitable, then all those profits will go back into your pocket as income — without having to work for an employer anymore. The only drawback here is that most small businesses fail within their first year or two; however, if yours doesn't fail and pays off its debt during this time period (or sooner), then borrowing money from banks may be one way to get started on creating passive income streams while avoiding entrepreneurship risk altogether. This strategy also works if someone else loans/invests money into your new company in return for equity shares.

Money You Pay Off Responsibly Without Racking Up Unnecessary Interest Fees

Pay off the debt as quickly as possible. Before taking debt, you should have a plan on how you will pay it off on with interest on time. Make sure you understand the terms of your loan, including when it’s due and how much interest will be collected if you don’t pay on time. A short-term loan for an important purchase or investment that includes a reasonable rate of interest and repayment schedule and has no prepayment penalties (i.e., you can get out of this type of debt early). Good credit card debt is used only when it makes sense—and never when there is an option to borrow through other channels (like loans from family members or friends).

Money You Borrow For Items That Lose Value With Use

Bad debt is money you've borrowed for items that lose value with use. In other words, you can't get a refund for depreciation or sell it for more than you bought it for. When you're done with the item, all of your money is gone—no resale value and no extra cash to spend on something else.

A good example of bad debt would be buying a car on credit (bad) versus paying cash (good). Cars depreciate as soon as they're driven off the lot, so if you buy one with financing from a bank or dealer and don’t pay off the loan before it reaches its end date, the bank will take possession of your car while they write off their loss. You won’t be able to resell the vehicle because its value will have decreased significantly by then—all because of interest payments!

Money You Borrow To Impress Other People

The key thing to remember about bad debt is that it's not necessary—it doesn't help feed or shelter you or keep warm at night. It just makes other people think that you're successful by making them jealous of what they don't have (or wish they did).

• A new car, more expensive than your current one which loses value the second you drive it off the lot. 😂
• A top-of-the line smartphone, even though your old one works fine for now—and the newest version won't be significantly better than your current one when it comes out in six months anyway.
• A vacation home that you don't need and can't afford, but which will make you feel like a rich person anyway.

Consider getting rid of your car payment altogether by trading in your vehicle for something cheaper (or biking). This will not only save you big bucks each month but also help reduce stress caused by traffic jams!

If possible, rent an apartment instead of buying one. Renting gives people more flexibility with where they want their home base while still allowing them access to amenities such as pools and gyms without having to pay property taxes every year. Money you borrow for things that make life unnecessarily expensive is bad debt.

Money You Borrow To Pay Off Another Loan

Don't, just don't! No need to repeat the cycle once again. This can include a mortgage, student loan, or car loan. If you have good credit, it's likely that most of the loans you take out will be good debts. However, if your credit history isn't as great and/or there are other factors that make lenders hesitant to lend to you (like if they think they won't get their money back), the interest rate on these types of loans will be much higher than what's considered reasonable for a regular consumer without any red flags on their credit report. Don't take too many loans at once because it can do unrepairable damage to your credit score.

Conclusion

When it comes to debt, you need to be smart about what you are borrowing money for. You don’t want to be so eager that you end up with an interest rate that is too high or a loan that has hidden fees.

You should always consider the total cost of borrowing before making any decision. This means taking into account all interest payments, late payment charges and penalties as well as any other costs associated with your loan before deciding whether or not it's worth doing.

I hope that this article has helped you better understand the difference between bad and good debt. Please share your thoughts in the comment section below.