Good Debt, Bad Debt

by Brandi Savitt – April 7, 2011

Making Smart Money Decisions

Debt: You might fear it, yet you probably have it.  But the real question is – do you understand it?!

Spending more money than you have is always a risky business, and getting in over your head is NEVER Fab & Fru.  However, not all debt is ‘bad’ debt!  Sometimes a loan can actually be a wealth building tool.  The key – DO YOUR HOMEWORK!

Plain Old Debt

We all know that the definition of debt is when you owe somebody something – in this case money! Well, who in the heck wants to get themselves into a situation like that, right?  It sounds like an awful lot of responsibility. And it is.  So, how could having debt ever be a good thing?

What is Good Debt?

Taking out a loan to invest in your future can equal good debt. Good debt includes anything you need, but can’t afford to pay for up front without completely wiping out cash reserves or liquidating other investments. Whether you apply for a mortgage to buy a home, or take out student loans to go to college, these investments are meant to MAKE you money in the long run.  However, before borrowing money, even if it seems like the best idea in the world, you MUST weigh the pros and cons of the investment at hand – and only take out a loan when you know you can afford the monthly payments!

What is Bad Debt?

Let’s face it, unless you’re looking to buy a home, increase the value of your home, invest in your education or a growing business, most other debt is NOT good.  Bad debt means charging or taking a loan for purchases that you DO NOT NEED and CAN NOT AFFORD!

The second you walk out of the store with the latest Marc Jacob dress, that dress has decreased in value.  So, unless you can afford to pay your credit card off in FULL at the end of the month, buying that outfit was not the wisest choice.  Credit card debt is the ABSOLUTE WORST kind of debt out there because it typically carries the highest interest rates going, and people quickly find themselves making only the minimum payments… sound familiar?  You’re not alone!

Let Your Money Work For You

Sometimes the decision to borrow money isn’t always about not having the cash on hand to pay for something.  You must also recognize how to let your money work for you -meaning -  you ALWAYS want to make sure that your savings is in the most profitable place.  If interest rates are low, compare what you’ll spend in interest on a loan versus what your cash could earn if you invested it. If you can earn a higher return from investing that money than what you will end up paying in interest during the life of the loan, borrowing a small amount at a low rate may make sense – because you will actually be making the cash to pay off the interest – plus some!

* Parents- this is often the case when you are considering taking out a loan to pay for your kid’s higher education.  NEVER pull money from a retirement account or other high earning savings account to pay for college. Paying for the typical low interest rates of student loans will most likely still be far less than what your invested money is earning! So by having your kids take out low interest loans to pay for school, you may actually be able to help them more!

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One Response to “Good Debt, Bad Debt”

  1. [...] alone each month?!  Seriously – take a look at ALL of the interest rates you are paying, and focus on eliminating your debt with the highest interest rate first.  More than likely, this will be your credit card debt.  And [...]

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