The Good, Bad, and Ugly Kinds of Debt
Have you ever really looked at what debt truly is? I mean, what the true definition of debt is. In its most basic form, debt is an amount of money borrowed by one party from another party. For so many people these days, debt has become a fact of life. It has become the standard way to pay for anything from houses and cars to gum and soft drinks.
It has become so routine that, for some people, debt seems neither good nor bad. If we take a closer look at certain types of debt, however, we can see that some debt can possibly be good and some can be bad.
I am starting with what I am calling good debt because we all like to hear the good news first. There are actually things you can go into debt for that may help you in the long-run. Good debt helps you generate income and should increase your net worth.
I have three basic instances when I think going into debt will be beneficial:
1. College Education
As much as everyone hates their student loan payments, a college education and a college degree has always equated to success. The general theory is that the greater a person’s education, the greater their earning potential. College-educated workers are more likely to be employed in good paying jobs and they tend to find better advancement opportunities. The investment in a college degree could pay for itself within a few years of entering the workforce.
If you borrow money to start your own business, you are investing in yourself. The entire point of starting your own business is to make money. Being your own boss and being completely responsible for your income gives you the drive and determination to succeed.
3. Real Estate
Real estate can be a great way to make money. I will preface that by saying that you have to know what you are doing. If you are looking at residential real estate, you could simply buy a house and live it for a few years before selling it for a profit. You could also buy a residential property and rent it out to generate extra income.
Is It All Rainbows And Unicorns?
Even though the above three scenarios sound pretty good, they all have their downsides. You have to realize that things in life don’t always go as planned.
1. College Education
Just because you get a college degree doesn’t guarantee that you are going to get a job and get rich. You need to carefully choose your field of study and make sure it aligns with areas that are paying accordingly. You may also have to relocate to a larger metropolitan area if you live in a smaller rural area. Larger cities tend to have higher pay scales.
Becoming your own boss is a double-edged sword. You are responsible for your wins and also for your losses. Many businesses run the risk of failure. You need a solid business plan and, quite frankly, some luck to go along with it.
3. Real Estate
Housing markets fluctuate and price appreciation is not as regular as it once was. Ask anyone who is involved in real estate, the risks are real but it could definitely be worth it.
No matter what downsides “good debt” has, some types of debt are just bad. When I think of “bad debt”, I think about debt incurred to purchase any kind of depreciating asset. What is a depreciating asset? Well, if it isn’t going to increase in value or generate income, don’t go into debt to buy it.
Have you seen the price of vehicles these days? New vehicles are expensive! Granted, you may need a vehicle to get to work to make money or to run errands, but paying interest on something that has already depreciated when the wheels hit the street is crazy.
We all like to be cool and drive the latest and greatest vehicle, but it may be time to pay cash for a reliable used vehicle if you are able to do so. If you can’t, take out a loan on the least expensive, but still reliable, vehicle you can find and pay the loan off as quickly as possible.
Clothes are worth less than half of what people pay for them and you will be paying interest on that amount, so you will actually be paying more than full price.
Vacations, fast food, groceries, and gasoline among other things are what I am going to consider consumables. Things that you use and then are gone. You are paying on things that no longer exist. Not only that, but you are paying interest on things that no longer exist.
4. Credit Cards
The interest rates charged on credit cards are often significantly higher than the rates on consumer loans and the payment schedules are not laid out to save you money. Keeping a balance on a credit card is just feeding the machine and taking money out of your pocket that could have been put to better use.
Wrapping It Up
I have gone over the good and bad of debt. Is it all black and white? No, there are some gray areas, but they can also get you in trouble. These would include consolidation loans, credit card reward points, and others. If used responsibly, they may have their benefits, but could also open the door to incur more debt.
I also know that we all live in the real world and not everyone can afford to pay for everything with cash. If you could, you wouldn’t be reading this article. Is having some debt bad, not really. Is letting it get out of control and taking over your life? Yes. But always remember that there are always ways to make it better and eliminate it the right way.