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Good Debt vs Bad Debt → Know the difference!

The myth is that no debt is good debt. Here's how you can learn to be smart about what you are going into debt for and if it can generate income for the future. 


Good Debt

“It takes money to make money." If the debt you take on helps you to generate income and increase your net worth, that can be considered positive. There are a few notable things worth going into debt for: 

Education- In the long run, being more educated can allow you to make more money in the future. Invest in yourself: taking out loans for a college degree can help anyone to get higher paying jobs and therefore benefit them in the future.

Small-business ownership- this comes with risk, but can truly make you into the entrepreneur you have always wanted to be. By being your own boss, you work hard for what you get. If you put in the time and money to make a great small business about something you are knowledgeable and passionate about, it can result in major wealth. 

Bad Debt

While good debt has the potential to increase a person's net worth, it's generally considered to be bad debt if you are borrowing money to purchase depreciating assets. In other words, if it won't go up in value or generate income, you shouldn't go into debt to buy it.

Cars- if you can afford to buy a used car with cash, do it. Over the years paying interest on a car, you will end up paying more than what the car was originally worth. 

Credit Cards- This is one of the worst forms of bad debt. The interest rates charged are often significantly higher than the rates on consumer loans, and the payment schedules are arranged to maximize costs for the consumer. Do not use credit cards for mindless things, instead try your best to pay up front for them.

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