Good Debt vs. Bad Debt And Why It Matters
I’m sure you’ve heard of good debt and bad debt but the question is, do you really know the difference, and why does it even matter?
Let’s first talk about debt in general. This is when you borrow money and you have to pay interest. This is the fee you that you’re paying for the right to borrow that money for a duration of time.
Whether you have good or bad debt, it still has to be paid back. There are many different sources where you are able to borrow from. It could be from a financial institution, a credit card, line of credit, a mortgage or even a friend and the source could be an indication of what kind of debt it is.
Bad debt is when you borrow money and the item that you purchase, decreases in value over time. A simple example is that of buying an item of clothing like shoes. If I buy new shoes and use my credit card to pay for the shoes and cannot pay off the credit card at the end of the month or any time soon, this is classified as bad debt, as the shoes will get worn out with time and no longer have any value. It is possible that I will still owe money for those shoes long after I stop wearing them. You might be starting off with small amounts of bad debt, but these amounts can quickly accumulate into huge debt which is difficult to get rid of.
Good debt on the other hand, is when you take the money that you have borrowed and you use it for something that’s going to increase in value over time. It might even generate income for you. An example of this would be if you borrow money and use it for purchasing a property. This property over time can increase in value and could generate income on a monthly basis. Another example of good debt, is if you borrow money to invest into a successful business.
When you leverage good debt, if you have sound planning and a little luck you will be able to pay off the original debt and still have generate income long after the debt is paid off.
There is also a kind of grey zone area when trying to identify good and bad debt. An example of this is purchasing a car. As a car quickly depreciates in value and generally classified as bad debt. However, it could be considered good debt if you register yourself as an Uber driver and use the car to generate income!
It’s important to consider the type of debt you’ll find yourself in, before you make the decision to borrow money. Do you really need that vacation? A new purse? A new car? These are things, which give you instant gratification but do not last and lead to bad debt accumulation.
You might be thinking, “what’s the point of all this? I know the difference … now what?”
The point is, to determine how you can actually take good debt and set it up to your advantage. Start considering how you can generate another stream of income. People are successfully creating start-ups and small businesses as a side-hustle, more than ever before. Never do anything that you don’t feel comfortable with from a risk perspective but with creativity and some good planning can be a really great way to begin to leverage yourself into generating additional income, which will make a difference to your life.
If you need ideas, check out my video on Do You Need Side Hustle? It’s a great way for you to be able to think about how you can potentially make money, leveraging good debt!