For many people debt is unavoidable. Even some of the wealthiest people on the planet struggle with their finances. One important thing to know is that there is a difference between good debt and bad debt. This post will help you discover how to manage money and ease your way into being debt free.
Some quick tidbits about debt that are frightening:
- Around half of Americans spend more than they earn every year.
- The typical household carries more than $10,000 in credit card debt.
- In the past decade, personal bankruptcies have doubled.
What is Good Debt?
Good debt can be defined as an investment. Good debt like home mortgages, student or business loans are almost always a wise choice. Why? Because they generally do not lose money. Clearly the real estate crash in the United States does not back up that statement, but if you think about it, many of those people were eyeballs deep into ‘bad debt’ prior to the crash and could no longer afford that ‘good debt’. Without question, in five years most property’s will go way up in value.
College or Business loans are also a form of good debt. They are an investment on your future and if properly researched they will pay for themselves many times over. Understanding good debt and bad debt will teach you how to manage money.
Good debt also includes items that you NEED but can’t pay for up front. In these cases be certain you can make the monthly payments before you take on these kinds of debt.
What is Bad Debt?
Bad debt is buying something that loses value or will cost you more money in the future.
“When you buy something that goes down in value immediately, that’s bad debt. If it has no potential to increase in value, that’s bad debt.” (Eric Gelb, CEO of Gateway Financial Advisors and author of “Getting Started in Asset Allocation”).
Other forms of bad debt would be to buy things you don’t need and can’t pay for. On top of that, plenty of people buy these things on their credit cards and end up being unable to make the full payments. If you borrow cash to buy things such as trips, clothes or entertainment and can’t make the credit card payments you will probably pay A LOT more for that item than it’s actually worth.
How Do I Eliminate Debt?
Good debt and bad debt should not co-exist if you know how to manage money. There is an easy way to get rid of bad debt fast so you can begin to chip away at the good debt. This probably seems like it’s against all logic but attempt to do this: pay off debt of lowest value first. This is an excellent way to set goals, witness the your successes and become more motivated to eliminating your bigger debts. Keep in mind you must maintain the minimum payments on everything else. You will see the results and be that much closer to becoming free of debt.
Something we all say is: ‘I wish I could become debt free.” For most that statement is just a wish. For others it feels like an unlikely dream. For some people, becoming debt free is attainable. You can be that person! Remember what causes debt, what solutions exists in managing debt as well as understanding good debt and bad debt. There is a way to start making your debt free wish into a debt free reality.
I do think that using the terms “good debt” and “bad debt” are deceptive to most people. This is a clear explanation of why the terms are used. However, debt is debt. Although good debt may be helping your credit score if you make payments on time, it’s also debt which can be passed down to your children or to other loved ones if not paid off before you die.
Both “good debt” and “bad debt” cause unnecessarily stress and aggravation.
Great post!
I do agree with Lauren, I think ultimately the best goal for a peaceful, stress-free life is no debt. Since for most people this is highly improbable, your post gives a great break down of where our priorities should be. This was a very good read, thanks for the informative post!