When you hear the word debt it tends to bring negative connotations of stress and unpaid bills to mind, but when it comes to debt there are two kinds, good and bad. While it’s possible to live entirely debt free, doing so could hinder your potential for investment and reaching your financial goals such as purchasing property to live in as well as for investment. There are varying types of debt from credit card debt to mortgage debt. I’d like to discuss with you the differences between good debt and bad debt.
Good debt is necessary to achieve financial milestones like owning a home or making property investments. One of the best examples of good debt is mortgage debt. A mortgage is secured against the value of the home or property itself and typically comes with lower interest rates that are affordable to most Australians.
The advantage of good debt by way of a mortgage on a property, is that the purchase/ investment is made with the aim of the value of the property appreciating significantly over time to cover the initial cost of the property as well as the interest payments incurred during the time the loan is being paid off.
Even though it may take you 30 years to pay off your debt, property is a great example of good debt because it will also give you the collateral to achieve further financial milestones and the acquisition of additional assets.
What’s considered bad debt is money spent that will not, or is very unlikely to appreciate in value. A good example of this is credit card debt. Bad debt is often unsecured so it is not backed by something of value making it more risky, and is often characterized by higher interest rates.
Another kind of bad debt is a car loan because vehicles have a tendency to devalue extremely quickly so by the time you pay off your loan plus the interest, the car has already lost a large deal of its initial value.
In order to keep healthy finances it’s important to try and avoid bad debt as much as possible. If you’re not going to be able to pay your credit card balance off in full by the end of the monthly billing cycle you should think twice about purchasing the said item whether it’s a holiday or a plasma television.
Entering into bad debt can be a vicious cycle that is hard to get out of. We hear about public debt in the news constantly and countries like The US raising their debt limit just to pay off the debt they have already accumulated. The same applies to personal finance so the more you avoid bad debt and save your money for smart investments the better your financial situation will be in the present and into the future.
I’ve talked about what good debt and bad debt are and the different types. It’s very important to consider the key differences when it comes to building a successful financial portfolio. The fundamental difference between the two is that bad debt will hinder your chances at putting yourself in a good financial position whereas good debt will allow you to prosper and allow you to invest in appreciating assets and put you ahead when it comes to your financial prosperity.
When it comes to investing it takes money to make money but if you don’t have the capital behind you entering into good debt will put you on the path to making great returns and successful investments that will have lasting results for your financial growth.