Good debt bad debt
The word "debt" often carries a negative connotation. However, debt can be a powerful tool to achieve your financial goals – if used wisely. The key is understanding the difference between good debt and bad debt.
The Two Key Questions
Rather than a universal good or bad label, consider debt in the context of your personal financial situation. Here are two key questions to ask yourself:
Does this debt help me achieve a financial goal? For example, a mortgage helps you buy a home, while student loans can finance your education (and potentially higher future earnings).
Can I afford the debt payments without sacrificing other goals or needs? Consider factors like interest rates, monthly payments, and impact on your budget.
Good Debt vs. Bad Debt: It's Personal
The answer depends on your unique circumstances. Here are some examples:
Mortgage Debt: This can be good debt if homeownership is a goal and you can comfortably afford the monthly payments while still meeting other financial obligations. Affordability depends on factors like interest rates, housing market dynamics, and overall costs associated with owning a home.
Credit Card Debt: This is typically considered bad debt due to high interest rates. Credit card debt can quickly spiral out of control and hinder your ability to achieve other goals. However, there may be rare exceptions. A small credit card debt used to finance a car repair might be considered good debt if you need the car for work and don’t qualify for cheaper forms of debt.
Student Loans: This can be good debt if a college degree leads to a higher-paying career that allows you to comfortably repay the loans. However, student loan debt can be a burden, so carefully consider the cost of your education and your anticipated future income. If you're a parent, explore tax-advantage options, like 529 plans in the US, to jumpstart your child's education savings.
Debt can be a bridge to your goals or a barrier that holds you back. Being intentional, reflecting on your needs, and discussing your options with a financial advisor can help you make informed decisions.
Let's Talk Money!
Which of your financial goals could be accelerated by using debt strategically?
Do you have any current debt that's not helping you achieve your goals? What's your plan to pay it off?
- - -
Disclaimer: This blog provides general financial information only, not professional financial advice. You are solely responsible for any decisions you make based on this info. Conduct your own research and consult with a qualified professional before making any financial decisions.