Many have suggested that no debt is good debt and while there is an argument to be made there, I would say that debt can have a positive effect on your life. You just need to understand what kind of value you are getting out of debt. There are also other kinds of debt that do not bring you any value for your future. Therefore, I am going to look at good debt vs bad debt and how to make the right choice for your situation.
Good debt is often characterised by the adage “it takes money to make money.” The focus with good debt is that taking that debt out provides you with long term value that outweighs the risk of taking out the debt. This kind of debt opens new doors for your future inventory of assets and earning potential.
The first example of good debt that I would like to highlight is a technical or college education. This kind of debt is an investment in your future earning potential. On average, those who are more educated generally earn more money. Education also has a positive correlation with the ability to find employment which is critical in an increasingly fast changing and competitive job market. Many find that the technical or college training they have received will pay for itself in a few years of being a newly educated worker entering the workforce. To get the best return on your investment make sure to research the college major that earns the most on average and go for that.
The next example of good debt would be to start a small business. If you have a great business idea and a thought through plan to bring your vision to life, you will need extra cash to bring that product or service into the market. Taking out debt in this instance is a no brainer because if your small business does will you will make a great return on your investment in the long term.
And for the last example of good debt, let us consider investing in real estate. There are a variety of ways of making money in real estate. On the residential front, you could simply by a house and live in it for a few decades before selling it for a solid profit. Property markets are always growing and usually pretty stable so you will find a sizable margin in this market with very little risk. Debt will make the investment into a home possible, because of the high value of homes these days.
Good debts generally add to the worth of individuals who use their money wisely to create wealth. Whereas bad debt does the opposite. Taking on debt to gather these assets will generally result in an awful deal for you in the long term.
The first and biggest offender of this is buying a new car. Cars, when bought new, are expensive. Most of us need a vehicle and that is a totally justified purchase if you are smart with your money and buy a car that will not dramatically depreciate like a new car will. For most new cars, when they leave the dealership it is already worth less then what you paid for it. So put that ego to the side and bite the bullet on a second-hand car if you can afford to do so. You will find that you can discover some great deals on second-hand cars that are only a few years older than new cars if you want a middle ground.
Other consumer goods in general are a good example of bad debt, because of the mark-ups that company’s put on their products you will find that they are usually making a lot of money out of you. If you look at clothes for example, you probably know that clothes distributors usually double their money in clothes sales. You will save a lot more money if you decide to shop for second-hand clothes.
What is Right for Your Situation
It often depends on where you are at in your life. If you have just finished high-school and you want to earn a good living, consider a technical or college education. But do not get sucked into bad debt that shackles you while you are trying to push forward into the next phase of your life. For college students and aspiring business owners alike, they will see a lot more benefit from making the right investments in their future instead of indulging in consumables that will drain you of your money.
To summarize, understanding good vs bad debt is critical if you want to make money in your life. Avoiding purchases that see quick value depreciation is a smart tactic if you are looking for long-term wealth. Investing in yourself and your assets will next you a secure, long term income.