The unfortunate reality for many people, is that debt is a fact of life.
For the majority of people, it’s the most reasonable way to acquire services or products when the cash is unavailable. In finance, debt is defined as money borrowed and/or owed from one person or institution, to another.
Debt is normally classified as either good or bad, and they influence your finances quite differently.Good debt is considered to be an asset where as bad debt is considered to be a liabilityClick To Tweet
Good debt can help generate income and increase your net worth, while bad debt normally does the exact opposite. Additionally, most forms of bad debt depreciate in value and in some cases accrue interest.
Although good debt can help you generate wealth and income, there are associated risks and may result in a loss of money as well. You should always consider the risks and consult with your financial advisor prior to making any financial decisions.
While on the road to financial freedom, good debt can be used as a method for generating passive income. Some examples of good debt include commercial or residential real estate, business ownership and investments. Such investments can include buying a lawnmower to start a lawn mowing business or purchasing a high quality camera to start a photography business.
Compared to good debt, where there’s an opportunity to see a return on investment, bad debt has no incentive or opportunity for a return. The most common form of bad debt comes in the form of a car. Cars are depreciating assets that can be extremely costly. In addition, maintenance, insurance and tax costs can be factored into the overall cost of owning a vehicle. If you decided to take a loan or finance a car you’re also going to be responsible for recurring monthly payments and accruing interest until the loan is paid in full.
Another common form of bad debt comes in the form of credit cards. Particularly retail credit cards. Credit cards normally carry a very high interest rate and are designed to maximize the cost for the credit card holder. What this means is, if used incorrectly, owning a credit card can cost you more than it can benefit you. Before opening and using a credit card, you should have a thorough understanding of the associated terms and conditions. You should also consider how opening a new credit card will affect your credit score.
Ultimately, no debt is good debt, but if you’re going to have it, you should try to have good debt so you can at least make a return on your original investment.