Debt is always here, but there’s a difference between good debt and bad debt. Some debts feel like chains, while others feel like lifelines. The following guide will help you figure out if a purchase is considered good or bad debt.
Firstly, you have to learn what it means to have good debt versus bad debt. If you understand these things, it’ll be easier to determine if a purchase is a smart one or not.
Good debt benefits you continually. Bad debt is usually associated with an item that does not benefit you; it loses value and usefulness quickly. If you start looking at purchases and attempt to separate them, you’ll start to make smarter choices.
In essence, you have to look at every purchase you make as an investment. For instance, in some cases, purchasing a car can be considered good debt. If you have to commute to work and other transportation methods don’t work for you, having a car is an investment. Not all cars will be an investment though therefore do your research and google “how much is my car worth” to help you time the market to buy or sell.
Just because something isn’t valuable in the future doesn’t mean it’s a bad investment or an example of bad debt. Take college education as an example. The value of that degree isn’t all that high.
It’s just a piece of paper, and you’ve invested so much in it. None of that matters at this point because that’s not the reason you go to college. The value doesn’t come from the item but from the opportunities it affords you.
Virtually all degrees and certifications are the same way. If the investment you’re considering rewards you with more opportunities, then it can still be considered good debt instead of bad.
You could do all the research you want to find out if something is going to be a good purchase or not and still get the short end of the stick. It has to do with the financing terms you agree to when you take on your debt. Sometimes, you are offered a bad deal, and what could have been a good purchase starts to feel like it wasn’t.
You have to be careful about credit cards and payday loans. Both offer you the chance to get what you need now rather than later. It’s an enticing proposition because patience isn’t something people practice much. People want things right now.
The problem is these companies can charge you crazy interest rates that’ll force you to pay significantly more than you borrowed. Even good debt can turn into bad debt with these financial entities. This is the reason you need to make sure you read the terms of your car loan, mortgage loan, and credit cards. Make sure you’re not getting the short end of the stick.
A good way to figure out good debt versus bad debt is to look at things you plan to buy as things you need as opposed to things you just sort of want.
Things you need allow you to live and function. Food doesn’t give you a great return, but you need it to live. That big-screen TV is nice, but you know it doesn’t provide anything to your existence. If you purchased a TV, you’d be taking on bad debt.
It’s difficult to look at things this way because many of the things people like to buy are things they don’t need. Clothes are a necessity, yet if your closet is full, you no longer need clothes. People still shop for new styles, which you should consider bad debt if you’ve got enough clothes.
Hopefully, some of this information helps you figure out what’s good and bad debt. The better you are at this, the more control you’ll have over finances, which is great.