Good Debt Vs Bad Debt

You may make a purchase at one time or another, which puts you into debt. When people hear the word debt, a negative viewpoint typically comes to mind. Although a lot of debt in the world is not good, there is such a thing as good debt. This type of debt can be beneficial to your financial growth.

How to Differentiate Good Debt and Bad Debt?

Instead of making a long list of good and bad debts, there is a principle that establishes what differentiates a good debt from bad debt. Good debt can increase its value, whereas a bad debt will decrease its value. You can also look at it as something that appreciates and depreciates. A good debt appreciates, which will gain value over a period of time. On the other hand, a bad debt depreciates and loses its overall value over time. Now that we know the difference between good and bad debt, we can examine some good and bad debt examples.

Good Debt

There are many good kinds of debts. Many people’s primary good debts include education loans, mortgage purchases, or other investments. Although these things can be thousands of dollars and can take years to pay off, they will be worth it in the end. Educational loans will help you to have more advantages at higher income opportunities. Not only will you be able to gain more of its value off property and investments once paid off, but you can also have more financial opportunities, which were not possible before.

Bad Debt

On the other side of debt, many more bad debts exist. A few bad debt examples include buying new cars, clothing, or house accessories/furniture. These are all items whose value will depreciate over time. Even if you plan on selling these items in the future, you will not be getting nearly as much as when you newly bought them. Although these items themselves are not bad, they are not beneficial when you do not have the money to purchase them or when you are trying to gain value on them. You can easily be in debt for decades on some of these items and you unfortunately will have nothing to benefit from it at the end.

How to Avoid Bad Debt?

Now that we have established the differences between good and bad debt and some prominent examples of bad debt, we can develop ways to avoid bad debt. If you tend to be a binge shopper, then using a debit card maybe your best friend. When you shop with a credit card, you can quickly lose track of what amount you are spending. With a debit card, this problem is eliminated as there is a max amount that you have in your account. Ensure that you have a limit amount in your chequing account to know it is your max for what you are spending that day. Another thing to keep in mind is paying off your credit cards. Although paying them off is the most important aspect, making late payments can lead to potential debt problems. To avoid any credit or debt damage to your score, ensure that you set dates to pay off your credit cards well before the due date.

How to Get Out of Bad Debt?

If you have gotten into bad debt recently or years ago, do not worry. Although it can be stressful, there are many solutions to get out of it successfully. The first step should be making goals, including when you approximately want to be debt-free and how you plan to get rid of your bad debt. Consider a monthly or bi-weekly schedule of how much money you want to put towards your debt. If your income is tight and it may be too difficult to make regular payments, see what other ways you can attain money to put towards your debts. This may include picking up more shifts at work, finding a second job, or creating a lifestyle budget to moderate how much you spend. It is crucial to remember that it takes time to pay off debt, so do not rush to get rid of it. You will be debt-free when you have a solid plan and stick to it.

How to Maintain Your Good Debt

Although it is vital to manage bad debts, it is also important for good debts as well. Consider a few tips on maintaining a good routine with your debt.
-Track your payments with a calendar
-Make a minimum payment, if not more, on every debt
-Focus on debts from largest to smallest (if you are working on one at a time)
-Make appropriate payments that correspond with your income and budget
-Be patient with your debt, always keeping in mind that it will be a process

Knowing different kinds of debts, such as good and bad debt, is very important in the financial world. Depending on your situation, you may be working on one or both of these types of debts. If you are looking for other advice on your debt, please feel free to reach out to us and we would be glad to help!

Sources

-Smith, Lisa (2021). Good Debt Vs. Bad Debt: What’s the Difference? Investopedia. Retrieved from https://www.investopedia.com/articles/pf/12/good-debt-bad-debt.asp

-Irby, Latoya (2017). How to Manage Debt of Any Size? The Balance. Retrieved from

https://www.thebalance.com/how-to-manage-your-debt-960856