Good Debt vs Bad Debt
Some might say “There’s no such thing as good debt!”
Maybe we can agree that at least some debts are better than others. Not all debts are created equal, yet many people make the mistake of treating all debts the same when they sit down to try to work through them.
I’ve identified the characteristics of each, and hopefully with this knowledge you can make better decisions about debt - how to stay out of “bad debt” and how to properly manage so-called “good debt.”
I’ll start off by saying; No matter what, any debt can be “bad debt” if not properly structured in relation to your specific financial situation. Some debts, however, are just plain “bad,” and you need to stay away from or eliminate them as soon as possible (with the right plan of course!)
Here we go!
Characteristics of Bad Debt:
Higher Interest Rates
No Tax Efficiency - not tax-deductible
Not backed up by an asset - can’t be liquidated by asset value
Bad Debt generally “costs you money”
Examples: Credit Cards, Personal Loans, Consumer Credit, Payday Loans, bad car loans, etc.
Usually used to buy “stuff” that we can’t afford and probably shouldn’t buy.
Characteristics of Good Debt:
Lower interest rates
Tax efficiency - interest costs generally tax-deductible
Usually backed up by an asset - asset can be liquidated to erase debt
Good Debt generally “makes you money”
Examples: Mortgages, Student Loans, Business Loans, some car loans.
Usually used to acquire assets or increase cash flow
Don’t forget - even Mortgages, student loans, business loans, and auto loans can be “BAD DEBTS” if they aren’t properly structured relative to your specific financial situation.
So, from an efficient planning perspective, it would be prudent to eliminate “Bad Debts” first and manage Good Debt appropriately.
It’s a great feeling to be debt-free - I’d never advocate rushing out to get into debt - good or bad - but understanding that "not all debt is created equal hopefully is the knowledge piece you need to think differently about your money so that you can make better decisions.
Watch for future articles as I break down mortgages, student loans, and auto loans, as these can be a blessing or a curse, so they deserve special attention.