Good Debt vs. Bad Debt?
Part 2: Good Debt
Alan J. Mendlowitz, RICP, CRES
The only way to get rich is to start with more money.” -John D. Rockefeller
In our last blog we discussed debt in general and things that can be bad debt. In this blog we explore what can possibly be considered good debt. At the end we will review the key points to guide you to spotting good debt so you can use it to your advantage.
Many people view debt as a four-letter word. But when it comes to business, debt can be a powerful tool to help you grow and succeed. When used correctly, business-related debt can provide you with the necessary capital to invest in your company, expand your operations, and hire new employees. It can also help you purchase inventory and other necessary supplies, and cover the expenses associated with running your business.
Of course, like anything else, business-related debt should be used in moderation. Too much debt can lead to financial instability and even bankruptcy. So, it's important to be smart about how much you borrow and what you use the money for. When used correctly, business-related debt can be a powerful tool to help you grow and succeed. So, before you shy away from borrowing money, make sure you understand what constitutes good debt and how it can benefit your business.
Things that can be good debt
Educational-related debts are often considered to be good debts because they can provide opportunities for career advancement and higher income potential. Student loans can be beneficial if they are used to finance education that leads to a higher-paying job or to have an easier time finding new ones should the need arise. An investment in a college or technical degree can often pay for itself within a few years of entering the workforce. However, not all degrees are of equal value, do some research prior to committing.
Debt to improve you as a person and your ability to earn more money or spend less. For example, paying for a financial coaching class despite being in debt will often pay for itself! Even medical debts can also be considered good debts if they are used to finance procedures or treatments that improve your health. For example, if you have a high-deductible health insurance plan and you pay for a surgery out of pocket, that would be considered a good debt. The surgery may improve your health so much that you no longer need expensive health care treatments in the future, which could save you money in the long run.
Debt is a tricky thing. It can be helpful in achieving important life goals or it can lead to ruin. The key to understanding whether debt is good or bad lies in your specific circumstances and what type of debt you’re taking on. Business-related debt, personal-related debt, and educational-related debts all come with their own benefits and risks. No matter what kind of debt you’re considering, it’s always important to do your research so that you understand the potential consequences of taking on that loan.
Good debt is often exemplified in the old adage “it takes money to make money.” If the debt you take on helps you generate income and build your net worth, then that can be considered positive. So can debt that improves you and your family’s life in other significant ways.
Bad debt, on the other hand, is debt that does not have any long-term benefits. In fact, bad debt can actually hurt your finances in the long run. This type of debt is usually incurred when you buy things you don’t need or can’t afford.
There are a few key things to keep in mind when it comes to good debt:
1. Make sure the debt is manageable. Don’t take on more debt than you can afford to pay back.
2. Try to find debt that has low interest rates. This will help you save money in the long run.
3. Make sure the debt is used for productive purposes, such as investing in assets or buying a home.
Imagine there was a form of good debt which will not let you take more than you can afford, has low interest rates even when market rates are high, has no effect on your credit score and needs no lengthy and tedious underwriting! What are you waiting for? Keep reading the Multitasking Money Blog Series.