What is the Difference Between Good and Bad Debt

The most difficult thing about money mastering is learning to live with what you have and not with what you wish you had. The latter is what gets you into debt, whereas the former is what allows you to improve your quality of life as time progresses.

Debt can be tricky. So many have the goal of living debt-free, yet it’s so difficult nowadays.

Loaning money in various ways has been readily made available to all of us and for many, it’s become a way of life.

It’s never black and white with debt but we think of it in two categories:

The Difference Between Good and Bad Debt

Good debt

Debt can be considered good when it helps you generate wealth and future financial growth. Typical examples are a mortgage, a business loan or a student loan. Don’t forget that the best investment you’ll ever make is in yourself and your personal development and growth.

Bad debt

Debt can be considered bad when it doesn’t bring you any return and is often a pure liability that depreciates in value over time (like a car loan) or requires you to pay interest (like credit cards or consumer loans for home purchases) so you spend more than what you borrowed.

We always recommend that you take a sharp look at all debt you have and break it down into what each of your debt items is for, how much they cost you monthly, how much interest you pay and what the timeframe is to repay them. Starting with a list is the best way to go because having all your debt in front of you will allow you to see the bigger picture and perhaps surprise you a bit as you may not have realised how much it was in total.

Then you will be able to categorise it into good and bad debt. After this, you can then prioritise where to start. Any debt with a 7% interest and above (this is usually the bad debt) becomes your priority alongside your emergency fund. Or if there’s another debt that is stressing you out more, then this becomes the most important one.

What are your thoughts on debt?

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