People often talk about how much debt there in and how their financial position is so bad. What they don’t realize is that is actually two different kinds of debt, good debt and bad debt.

Good debt creates value for you, whether this is a financial figure or possibly personsel skills and knowledge. So student loans would be good debt, this is because you used to the money to make yourself more knowledgeable and more marketable in the workforce market.

A mortgage on your home is also good debt; as you pay down the mortgage you are gaining equity in the property. You also gain additional equity as the property appreciates in value over time.

Real estate loans for rental properties, business loans and investment loans are also good debt, and are very effective at building wealth.

So what is bad debt then? Bad debt generally has a much higher interest rate and is often used to purchase disposable goods. Because you do not retain any equity in these purchases the money is lost.

This personal debt is most often seen in the form of a credit card, where the interests rates are practically unbearable. Auto debt can also be very dangerous, it is very important to examine whether or not you truly need a new or additional car before purchasing one.

A rule of thumb that I’ve heard is “if you can’t afford to pay in cash and it is not going to go up in value, you can’t afford it”

Now there may be emergency situations where this philosophy is impossible to maintain, but with a proper emergency fund you should be able to recover from almost any sudden expense.

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Filed under: Debt, Saving