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Understanding Good Debt vs Bad Debt

Taking on debt poses a risk to your financial assets and long-term wealth strategy if not properly managed. Bad debt can be avoided in some circumstances, but it's important to know how to handle these loans if there is not an alternative solution.
What Is Good Debt Vs Bad Debt

What Is Debt?

Debt is any amount of money or cash equivalent provided to a person or organization to be repaid to the lender. These loans take the form of mortgages, car financing, student loans, etc… Each agreement can vary in terms of repayment periods, minimum payments, and other stipulations. In most cases you can expect to pay interest on the principle amount loaned out. It’s important understand good debt vs bad debt and use it to your advantage.

Bad Debt

Loans and debts incurred to pay for liabilities and expenses that don’t generate income are generally considered bad debt. The reason being that the purchase does not increase your overall value and will likely have depreciated itself in value by the time you pay it off. In addition, with recurring interest payments the purchase could cost up to twice as much in the end if you don’t pay off the balance quickly. Prevent falling into this trap by managing your expenses and putting money to the side for items that bring value to your financial journey. If you must use debt to stay afloat take additional precautions by paying more than your minimum balance each month so you don’t fall behind the added interest.

Good Debt

Taking out a loan or receiving an investment for financial gains is considered good debt. Unlike the former good debt is put toward an asset or business plan with the intent to improve the recipients ability to make money. In this instance, the likelihood of debt repayment is higher because the business would in theory turn a profit and pay for itself. This takes a great deal of risk off the recipient as they are not required to have the capital to start, but simply execute the plan and then pay off the debt before taking the profits.

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