Good Debt Vs Bad Debt – Enhance Your Borrowing Experience

One may wonder how debt can be “good” at all.

Is it even possible? Well, to your surprise, it can actually be quite useful. 

People sometimes choose to manage their expenses independently on a cash basis. However, others may rely on borrowing to fulfill big-ticket goals.

This is why debt (also known as credit) can be classified into good debt and bad debt. Learn more as we dive into this comprehensive article to gain deeper insights.

Now that we know that debt can actually fall into the “good” category depending on the reason behind it, let’s understand the “how” of it. 

So what exactly is a “good debt”?

It’s like a long-term investment. When you take out a loan to invest in yourself to eventually make more money, that’s when you have good debt. It’s similar to “investing money to make more money.”

Here are a few classic examples:

•  Education
  Learning never stops. If you feel like upskilling, a debt to bear the tuition cost can turn out into a great investment. It is like funding your education to better yourself for better opportunities and better pay. This, in turn, acts like “spending money to earn more money.”

  In this case, applying for a student loan is having a good debt. 

•  Real estate
  This is another example of a great way to secure one’s future financially. Taking a mortgage to invest in real estate can be an intelligent decision.

  The property can be sold after waiting for a few years so that its value can appreciate. Another option can be renting it out which can become a steady source of income in the future.

  Therefore, any endowment which you do that can ensure a long term return can qualify as good debt.

• Premium work equipment
  Investing in work equipment can also be a great idea. It will not only pay off in the long run, it can also enhance the quality of your work immediately.

  Suppose, you have a remote job. In this scenario, investing in a stable internet connection, a dedicated space, and work-related equipment like a mic, desk, comfortable chair, and more is a wise move. Aside from making your workstation more organized and office-like, these can help make you be more productive in the comfort of your own home.

  One may buy these assets as a one-time investment. However, it can turn out to be good debt for those who rely on borrowing high-end equipment to perform their tasks better and be able to support their family.

What’s a “bad debt”?

Now, if you are borrowing for assets that may burden you in the future instead of helping you with your plans, then those fall under the category of “bad debt”. These may not add more value to your finances or how you envision your life to be. 

Here are a few examples:

• Expensive clothes and consumables
  We don’t realize when we start unconsciously investing in things that may depreciate in terms of financial value. We’re not saying that spending on clothes is bad. However, doing it beyond your financial limit and capability may hurt your financial freedom.

  Borrowing for expensive clothes may not be the best thing to do. Yes, you want to look good, feel good, and keep up an appearance for the people around you BUT the amount of money you spend on clothing will inevitably add up. Before you know it, you would’ve amassed a room or two of shirts, pants, shorts, and skirts that will just gather dust and end up being a dead investment.

  Instead of piling up on pieces of garment that go out of style, go for good debt that can help you earn a steady income. Once you’re more stable, that’s the time you can go for other expenses. 
  
  

• Luxurious/expensive cars
  While it can be necessary to buy a vehicle for better mobility, it’s not advisable to get a luxurious one just to show off. Car value depreciates very quickly, not to mention the maintenance fees that come along with it. Keep this in mind if ever you will borrow money to get a vehicle of your own.

  Therefore, hold on and invest wisely. 

• Expensive electronic devices
  With the world’s rapid technological advancement, we often get to see attractive gadgets upgrading every now and then. Along with those upgrades come their soaring prices. Borrowing a huge sum of money to buy expensive tech is not a wise way to spend money.

  Investment in gadgets, unless it is absolutely necessary for work, such as if you’re a programmer, video director, music producer, etc. won’t have a significant return. Incessant and unnecessary upgrades every now and then would actually set you back.

  If you have a great passion for gadgets and devices, it would be better to come from a secure place. Relying on borrowing can cause more financial stress.

How to define good debt vs bad debt yourself.

Now, once again, good debt vs bad debt is a relative concept. It depends on your financial situation and borrowing limit. For instance, if you’re fresh out of college, borrowing money for house expenses may turn out to be bad debt for you. Why? Because you may not have sufficient funds to pay for them. In this situation, a good debt or a bad debt is a relative principle.

If you are already indebted because of some assets, it wouldn’t be a good idea to borrow more than you already have. You may have an internal debate on whether it’s good debt or not. Considering your situation, it’s surely not a good idea to carry the extra burden of loans. 

Now, decide what’s good debt for you and start working on your long term vision. 

Chart your priorities and see which are your urgent needs and which aren’t. Filter it with choices you can do without. 

A good debt is only good when you know where it will give you long term returns. 

The next time you find  yourself wondering if the loan you’re about to make is good or bad, here’s a cheat sheet you can refer to:

Always remember to have a game plan that you can follow and have fun in the process. Good luck!