What is ‘good’ debt?
Generally speaking, good debt refers to borrowing money to invest in something that increases in value over time or generates income. Good debt can be viewed as an investment in your future wealth.
Examples of good debt include:
- Mortgages: As real estate tends to appreciate over time, most people acquire equity, which increases their net worth.
- Student loans: Education is an investment in your future that will increase your future earning potential.
- Business loans: Business loans are considered good debt if used to grow a profitable enterprise.
What is ‘bad’ debt?
Conversely, bad debt typically involves taking on loans to purchase depreciating assets. Bad debt can be detrimental to your financial health as it often comes with high-interest rates and can lead to a cycle of debt accumulation.
Examples of bad debt include:
- Credit card debt: Especially if used for non-essential purchases and carrying a high interest rate
- Taking loans on luxury items or vacations: Unlike a house that appreciates, these discretionary spends won’t increase in value.
Tips to get out of bad debt
If you are becoming overwhelmed with bad debt, here are some strategies to more effectively manage and reduce your debt:
- Create a budget: Track your income and expenses to identify areas where you can cut back and allocate more funds towards paying off debt. Cut up credit cards to avoid adding to your debt while you're working on paying it off.
- Prioritize debts: Focus on paying off debts with the highest interest rates first while making minimum payments on the others.
- Negotiate with Creditors: Negotiate lower interest rates or more favorable repayment terms to make it easier to pay off your debts.
- Consider Consolidation: Consolidating multiple debts into a single loan with a lower interest rate can make it easier to manage your debt.
- Seek Professional Help if Needed: Consider seeking help from a financial advisor or credit counselor who can provide personalized advice on the best debt repayment strategies.