What is Good Debt?

Debt

Debt

Most of us grew up during a generation that building debt was a hobby. Money flowed, the economy was booming and incomes kept growing. Investments, Real Estate, most of your assets kept blossoming.

Whether, you were a blue collar guy, driving the delivery truck or the accountant in the big office, credit cards, personal loans, lines of credit, financing, were all common everyday practices. The money flowed in and it flowed out. Unfortunately for many of people it flowed out faster than it flowed in.

It was the time of instant gratification, instant credit and buy today, take home today. We all piled debt on top of debt never looking at the fine print, caring about the interest rates, or the terms. We just spent “money” but we never really owned.

As the economy turned against all of us, from the guy on the loading dock to the corporate executive, we all had to take a good hard look at our spending habits and evaluate our purchases and our debts.

Now that we are looking at our debts and are conscious of our balances and our purchases, we have to ask ourselves, what is the difference between good debt and bad debt?

Good debt falls into several categories. The first are purchases of assets, such as your home, your car, or other investments. If your debt is to purchase an asset, and the asset is worth more than the debt, these are good debts. Just because your house value fluctuates and some days it is worth less than your mortgage and some days more, it is still good debt, eventually your house will be worth more than your debt and you will have value in it. If you financed your car, but purchased wisely, with a good down payment, most of the time your car is worth more than you owe, so this is a good purchase, opposed, if you leased your car, you never own anything, have no asset and just have debt, this is a bad debt. If you purchased a car that was way more then you could afford, with no down payment, and your payments are high and the interest rate is high and you will want to get rid of the car before you pay it off, this was not a good purchase and it is bad debt.

Purchases on your credit cards, if wisely thought out, if budgeted and made after a thoughtful decision, could be classified as a good debt, but anytime you are going into debt if you do not have an asset to support the debt, you are making bad debts.

Anytime you use your credit wisely, you are making smart purchases, and good decisions, but good debts are debts with assets behind them. Remember to always think before you purchase, and use your credit wisely as you can never predict tomorrow’s economic situation.

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