Good Debt vs. Bad Debt: Meaning and What Is the Difference between Two

Question: Every time I spend money, I feel guilty that maybe I am driving myself into debt… I keep having nightmares of how creditors are going to be beating down my door asking me to pay back what I owe them. Is this the debt that I should be worried about? Is there such a thing as good debt? Will there ever be a time when the money I spend goes to a good cause or will come back to help me at a later date? Can you please tell me something about good debt vs bad debt? Thank you!

Answer: Whenever we see or hear the word “debt”, alarm bells go off in our head and we look for a way to escape. The 1st thing you need to understand is that Debt is not always bad, and does not mean you are in trouble. For many, debt could be a loan, or mortgage, or some large expense they have incurred.  However, you need to realize there are two different kinds of debts- both very different and poles apart from each other!

You can’t worry thinking they are both the same, and so the 1st thing to do is learn about the two forms of debt- the good debt and the bad debt. All it takes is for you to plan, prepare and act accordingly to have a safe and secure future, at least when it comes to finances.

Bad Debt

Let us look at what a Bad debt is first before talking about the Good debt! Bad debt is the kind of debt where you invest money, but don’t gain anything. It could also be the kind where you spend more on the product than the actual cost of the product.

For example, imagine you buy a DVD that costs 40$ with a credit card. You will be charged about 20% more if you don’t pay the bill on time. What this means is that you have paid more than the value of the DVD and therefore lost that much more money. This is a classic example of bad debt.  Another example would be if you drive yourself into debt to pay for a vacation, then it is going to hurt you bad.

Bad debt arises from overspending, going overboard on activities/things you don’t really need and those that give no returns!

Good Debt

On the other hand, Good debt is a total opposite of the Bad debt. Here, you can spend money and be assured to earn double if not more. Say, you take a loan to pursue a degree, you are sure to be earning that much more after you graduate. Similarly, investing in gold or stocks is also a good debt, for in most cases if you are a smart investor, you will earn higher than your investment.

Good debt is referred to as “leverage”. You are going into debt to earn money for yourself at a later date.  You could invest in a business, which will start making profits over a period of time. So, the $500 you invested could yield you $5000.  Even car loan is good debt. If you asking how, think about it?

You are saving on transport and other expenses that you could incur if you didn’t have a car.  Any expense that saves you and protects your income is a good debt!

Hope this helps!

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