Have you ever heard the saying that there is no such thing as good debt?
Is this true or not? Well, there isn’t a clear answer.
We all know (hopefully) that debt is not a great thing to have. Nobody is proud to be in debt!
However… there are situations where debt can be helpful, as we’ll discuss, so it’s not all “bad,” so to speak.
Let’s get straight into it…
How to Decide Which Type of Debt is Worth It
Many people see debt as a nasty word, with good reason. Most of us shudder at the thought.
Some people will tell you to stay away from loans at any cost, but on the contrary, some loans can improve your financial situation years from now.
Student loans, home loans, and business loans are all examples of debt that can help you to make more money in the future.
With student loans, you can get a degree that will get you a better job which will earn you more money.
You can invest in real estate and use debt as leverage to purchase homes/condos/apartments and then rent them out.
So, yes, debt can be helpful, but does this mean that there is “good debt,” or is there no such thing as good debt?
Let’s dig deeper into this…
Examples Of Bad Debt
We briefly discussed some examples of debt that can be classified as good, but what about bad debt?
Let’s check out some examples of bad debt…
- Credit card debt
- Payday loans
- Personal loans
One of the most used types of debt is credit card debt, which can be really dangerous!
Credit cards usually have a high-interest rate, meaning you will spend a lot of money paying off interest.
Plus, most people use credit cards for discretionary spending, not on assets or things that will benefit them in the future.
Credit cards should be used carefully, especially if you are not a smart spender!
This has to be the worst kind of debt out there, and I recommend staying very far away from this one!
Payday loans are very dangerous because they usually come with really high interest and are short-term debt, so you’ll have to pay them back quickly.
If you don’t pay off payday loans, they will quickly spiral out of control, and you will find yourself in deep trouble.
I recommend avoiding payday loans at all costs! If you want to know what bad debt is, payday loans are a form of bad debt.
This differs from the previous two because personal loans can be used for good or wrong reasons.
Personal loans are here because if you take out a personal loan for discretionary spending, then it’s a bad idea!
You shouldn’t take out a personal loan for things such as new clothes, a vacation, etc…
This is just a bad idea where you will only dig a deep hole for yourself!
Is It True That There Is No Such Thing As Good Debt?
Yes, there is no such thing as good debt. Debt is nothing to be proud of or keep around.
However, there is such a thing as better debt and worse debt because some types of debt are better than others.
Reading this can be confusing, but essentially no debt is good, but some are better than others.
For example, it’s much better to take out a student loan to get your college degree than to take out credit card debt for some clothes!
That makes sense, right?!
Now, just because the student loan is the smarter decision in this example, does it mean you shouldn’t pay it off as soon as possible? No, of course not!
You should pay off any debt as soon as possible; this will take a massive weight off your shoulders.
Now, you might hear some people say that depending on your loan’s interest rate; you might not want to pay it off as soon as possible.
One common method is to pay the minimum payment on your debt if the interest rate is below 7 – 8% and invest your money in the stock market.
This is because the stock market returns 10% on average but is around 7 – 8% adjusted for inflation. It will be more beneficial for you financially to invest if your debt’s interest rate is below this.
Mathematically this checks out, but remember, personal finance is personal. I know… I know… a cliche but true!
Even though it might be better mathematically to invest over paying off debt in these circumstances, it depends on your mindset.
It’s hard to keep debt around lingering for a long time, and this is because of the fact that no debt is good!
Even though the method above might work, it is recommended to pay off your debts as soon as you can so you don’t forget about them and rack up interest over time.
It also feels great to get rid of debt once and for all! When you no longer have that payment, you will feel free!
Handling Debt Properly
Now that we know that there is no such thing as good debt but also that some debt is better than others, how do you handle it properly?
Listen, we all will have some debt at some point in life, whether it’s student loans, a car loan, a mortgage, etc… you will come face to face with debt, so you better know how to handle it properly!
Now, if everyone were perfect and did the right thing all the time, choose the mathematically better option of paying off high-interest debts and then keeping the low-interest debts around while investing in the stock market.
But… We are not perfect! Far from it; I mean, look at the amount of credit card debt there is in the U.S., not pretty at all!
So, I recommend paying off your debts as soon as possible so you can be free from the metaphorical shackles.
Now there are two tried and proven methods that you can use to kick debt to the curb, and they are the debt snowball and the debt avalanche.
The Debt Snowball
The debt snowball involves paying off your debt from the smallest to the largest.
You will pay the minimum payment towards all your other debt other than the smallest amount; for the smallest amount, you will throw as much money as possible towards it until it’s paid off.
This is a psychologically sound method because it lets you build up momentum with paying off your debt, so you get into the habit of paying off debt.
I highly recommend starting with this method, as it works so well!
The Debt Avalanche
The other method is the debt avalanche, which involves first paying off your debt by the highest interest rate.
This method is better mathematically than the debt snowball because you will save money on interest by getting rid of your highest interest-rate debt first.
Choose which method works best for you; the important thing is that you stick with it!
So, yes, there is no such thing as good debt, but some are better than others.
Some types of debt, such as student loans, mortgages, and business loans, can help you get ahead, but debt is nothing to be proud of.
Pay off your debt as soon as possible, so it doesn’t weigh down on your shoulders!
What do you think? Is there such a thing as good debt, or is all debt “bad”? Let me know in the comments below!