Nearly 80% of Anericans have debt of some sort – but did you know not all debt is bad debt?
Nearly 80% of Americans have debt of some sort – but did you know not all debt is bad debt? [Hey Moneylion,] My name is Austin Hankwitz and I talk about personal finance and investing online. I grew up in a small town in northeast Tennessee and I had to learn about debt the hard way – let me teach you what I’ve learned.
So we all know what “debt” is – right? It’s owing money to someone else. It comes with an interest rate and sometimes origination fees, but something you might not know is that there is such thing as having “good debt.”
It’s a pretty simple takeaway – if, over the long term, the debt is helping you reach your financial goals it could be considered “good debt.”
Let me give you an example – doctors. We’ve all been to the doctor’s office at some point in our life, and we all know doctors make a lot of money. But, at some point, that doctor had to become a doctor, and that means medical school – which is not cheap. Going into debt for education that will further your professional career and increase your earning potential down the road could be “good debt,” because over the long term it could help you meet your financial goals.
Now let’s talk about how some people are doing debt wrong – or “bad debt.” This could mean “buying too much car” when shopping for a new vehicle, buying that brand new iPhone when your iPhone 11 works just fine, or just generally taking out high-interest debt on a credit card.
Debt you shouldn’t feel bad about? A mortgage, student loans, or a small business loan – considering all of these things, over the long term, could help you meet your financial goals.
Not all debt is bad debt. Nearly 80% of Americans have some type of debt, and it can feel challenging to keep up at times. This predicament results in people overlooking debts that can lead to positive outcomes. We’ll outline the differences between good debt vs. bad debt.
What is a good debt?
Taking on debt enables us to spend tomorrow’s money today. Instead of saving enough money for a big purchase, we can borrow money and pay it back later. Some debts nourish careers and lead to compelling investing opportunities.
Many doctors get paid well because of their in-demand skills. However, before doctors get high-paying salaries, they must first complete medical school. This education isn’t cheap and may put you in debt. However, at the end of the tunnel, you’ll have the skills to pursue a reliable and lucrative career. These student loans can lead to a profitable return on your investment over time.
A house is another example of good debt. You borrow money to buy an asset that appreciates over time. Some homeowners purchase multiple properties and convert them into rentals. They use debt to finance the properties and generate cash flow via tenants.
What is a bad debt?
Not every good debt pans out. Some homes decline in value, and you may decide against becoming a doctor after receiving your medical degree. Every investment carries a risk. Bad debts also have risks, but they present no financial upside.
Buying the latest iPhone when your iPhone 11 works just fine is an example of bad debt. Your new iPhone’s value will decline over time, and it will provide minimal improvements over your current iPhone. Buying a luxury car and racking up credit card debt also represents bad debts.
The interest payments will rise as you accumulate more debt. Each purchase makes it more challenging to become debt-free. Your principal expands, and you’re left with fewer dollars to pay it off. No opportunity for a return on investment provides zero upside in exchange for a substantial downside.
No one is perfect. Some people want to buy nice things for themselves from time to time. We shouldn’t deprive ourselves of enjoyable products and services. However, smart spending minimizes our bad debts. We can look for opportunities to save money and seek alternatives.
Spending smartly gives us more money for good debts. When people invest in their education and portfolios, they stand a better chance of hitting their financial targets.