It’s no secret that debt can be bad. But as long as we don’t miss payments and build on the right type of debt. We should be good.
So, how do you know when it’s good debt or bad debt?
The answer is simple.
If the debt you’re making will earn you more wealth in the future, it’s good debt. And if the debt only benefits you short-term, it’s bad debt.
Most of us struggle to pay the bills or start a savings fund because of our bad debt. We spend money we don’t have to buy things we think we need. And we end up with huge amounts of bad debt.
Here are the secrets to understanding the difference between good debt and bad debt.
Do you have debt that grows your net worth?
If you answered yes, give yourself a high-five. You’re heading in the right direction.
Good debt increases your personal assets. These are things like education, real estate or starting your own business.
Let’s look at this in more detail.
The best investment you can ever make, is investing in yourself.
Typically, the higher your education, the greater your salary. Employers are more likely to hire someone with an education than someone without one.
Taking out a loan to pay for education should pay itself off within a few years of being employed.
Student loans have low interest rates, which make it easier to pay off for someone starting their career.
Student loans also give you an opportunity to build your credit score.
When you apply for credit later in your life, lenders will look at how you treat your debt to determine the interest of that debt.
Lenders want to know that you are responsible enough to pay back the money you’ve borrowed. So, pay back your debt on time and keep your credit score high.
Investing in property is a straightforward good investment.
Property, just like a student loan, has a low interest rate and the value of property tends to increase over time. And best of all, this type of debt is tax deductible.
Careful planning is important when you invest in property. Only invest in what you can afford and keep that interest as low as possible. Having a good credit score will help you get a lower interest rate, making it easier to pay off and own the property outright.
As an added benefit, property comes with options.
You can buy a house, live in it for a few decades and sell it for a profit. Or you could buy a house, rent it out and earn an additional income.
Use your property to your advantage.
In some cases, taking out a loan to fund a business is not a good idea. Small business loans are generally harder to get because they’re risky.
Small businesses tend to fail within the first two years. However, if you are driven, business savvy and have some luck, taking out a business loan might be the best investment you’ll ever make.
If you have or you’re thinking about taking out a businesses loan. It is important that you have a good business plan in place. This will help you generate business and prevent it from failing.
We make bad debt when we buy things that lose value over a short period of time. You’re not adding any value to your net worth.
Bad debt would also be any debt that has a high interest rate.
The rule of thumb here would be that; if you can’t afford it and don’t need it. Then don’t buy it.
Credit card debt is one of the worst kinds of debt that you can have. And unfortunately, most of us have credit card debt.
This type of debt has high interest rate and it is complex to figure out exactly how much you’re paying on interest alone. Find out how to keep your credit card interest free and save on your purchases.
Credit cards are an investment for the bank. Not for you.
Purchasing a car is generally considered a bad investment, especially a new car. A car decreases in value over time.
Picture this; you buy a new car from a dealership and drive away filled with pride. But, by the time you’ve hit the warm tar. Your brand spanking new car is worth less than what you’ve just bought it for.
Instead, purchase the most reliable second-hand car that you can find. If you can’t afford it in cash, take out a loan and pay it off as quickly as possible.
No one says you shouldn’t have a car. But be smart when you’re buying a car.
Be ‘Bad Debt’ Free
Most of us have bad debt lying around.
We use our credit cards to help us get through the month. And we take out small loans to pay off unexpected emergency payments.
We get it. It’s tough out there.
Debt becomes a problem when we have to choose between paying off our debt or buying groceries.
If you have too much debt lying around, and you think you’re overindebted. Contact us today and we’ll help you get rid of all your debt, so that you can start living a stress-free life.