Is There Such a Thing as Good Debt? The Good vs. Bad Debt Debate!
One out of every five American citizens is grappling with debts on medical bills, mortgages, student loans, and credit cards, exceeding their savings and liquid assets. This is according to research by the University of Michigan.
Is there such a thing as good debt? Good debt is money that you borrow to increase your net worth and help boost your income. Financiers classify the following as investments worth a debt.
Real estate investment. Since property appreciates in value, buying a house for resale, renting out, or commercial real estate is a worth investing even with borrowed money as it can bring more.
Investing in high return bonds and stocks is another way you are likely to recover your money fast and make a profit. It, however, needs someone who understands the risk and well versed in the trade.
Education is also considered as an investment worth borrowing for, as the expectations are that the knowledge and skills gained open doors for lucrative well-paying jobs. If this happens, then the returns of the investment are positive.
As with everything else, moderation is key. A good debt quickly turns into a bad one when a borrower overindulges and takes much more than they can pay comfortably. You may have a provision for borrowing a considerable amount. Take what you need and can pay for though. Consider the interest rates before you proceed.
Again, recent changes in the market are a clear indication that even real estate does not guarantee ROI. Though the market fluctuated downwards, other charges like home maintenance costs, real estate taxes, homeowners association fees among others are constant.
While bonds and the stock market has high returns, one can quickly make massive losses in a split. Unfortunately, some factors that affect the stock exchange and bonds market are beyond the stakeholders. For example, political stability. A sudden downhill trend may turn a millionaire whose main trade is the money market to a pauper.
Education on its own does not guarantee money at the end of the course. There is need to select your career and field of study carefully. The current crunch plays a significant role in job availability. During economic down-times, good jobs are hard to find.
While the above mentioned are cases of good debts gone bad, there are out-rightly bad debts. Here are some:
Borrowing to spend on luxuries or buy a luxury car is not wise investment hence bad debt. Paying a huge interest on a new car is a bad financial move, while you can opt for a used cheap car that functions well and meets your needs. A car depreciates fast. Borrowing to buy a new car is therefore not a sound financial move. Also, try to apply for interest-free loans
You should always purchase clothes and other consumables on cash basis only. Paying interest on things like vacations, clothes, gas, vegetables is not practical. To avoid such debts, you need a serious budget plan, and to adopt a lifestyle you can afford.
Credit cards cover a considerable percentage of the bad debts as the interest charges are higher compared to consumer loans rates. While credit card reward systems offer incentives, the interest rates offset the benefits.
Few people can afford to pay cash for all the services all the time. Just like everything else, it is crucial to take credit after a careful thought process. Though some amount of debt is inevitable in our society today, a good debt can quickly turn into a bad one. With a sound decision and necessary information, however, debt can help one create wealth.