Debt can seem like a dirty word to any of us who care about our finances. Many people shudder at the mention of the word, and they’re terrified of what their future looks like because of debt. Oh, and paying off debt? Impossible!
But we’re letting you in on a little secret: not all debt is bad.
That’s right, there’s actually bad debt and good debt. While it’s helpful to avoid any type of debt, sometimes that simply isn’t possible, and sometimes, debt can help you in the long run.
Let’s break it down.
Bad debt is any debt that is used for depreciating assets or assets that require you to take out a loan to buy when you won’t be able to get that money back later.
Examples of bad debt:
A credit card. You don’t get any value from a credit card, and if you buy a $15 shirt, you’ll end up paying more for it later unless you pay it off immediately. You likely won’t sell that shirt once you’re done with it, and even if you do, there’s almost no way you’ll make more than the $15 you spent on it, making it bad debt.
A car loan. We’ve all heard it - as soon as you drive that new car off the lot, it begins losing value. You’ll never be able to sell your car for the amount you put into it, so having a car payment is bad debt.
Good debt is anything that is going toward an appreciating asset, or something that will allow you to buy something that will appreciate over time.
Examples of good debt:
A mortgage. The more you put into your home, the more value you give it. Plus, the real estate market is always fluctuating, meaning if you bought when prices were low but sell when prices are high, you’ve made an even larger profit than you anticipated making on it. Because your home appreciates over time, a mortgage is considered good debt.
A school loan. This can be a tough one to wrap your head around, because who likes school loan payments?! However, because you will likely make more money down the road from this degree, it can be argued that a school loan is, in fact, good debt.
What this means
This doesn’t mean you should start stocking up on good debt, and it certainly doesn’t mean you’re doomed if you have bad debt.
This is simply a way for you to see what your spending decisions are doing and how they’re affecting you now and in the future. While taking out a student loan may seem daunting and may even seem like a terrible idea if you’re struggling financially, it’s important to take into consideration the ultimate payoff down the road. The same goes for bad debt, though. You don’t necessarily want a car payment, but if that’s your safest option, it may make sense to go with it.
Ultimately, it’s important to make sure all of your debt is taken into consideration when you spend anything. That’s why a Daily Spend Limit can help - it takes out the fear of spending too much and going into more debt, and it allows you to see just how much money you can spend each day on whatever you want without affecting your debt payoff.
Just for good measure, here’s a video of our own Matt Reiner explaining bad debt in the time it takes to fill a plastic cup with beer. Cheers!