Good Debt vs. Bad Debt
Debt might be a four-letter word, but it’s not all bad. In fact, some types of debt are even considered good. If used in the right way, good debt can actually help you build wealth.
In general, debt amassed to purchase disposable goods or items that fall in value is considered bad. Examples of disposable goods include clothing, gasoline, and meals. After factoring in the interest paid over time, a $100 splurge on a nice dinner can end up costing significantly more—and there’s nothing to show for it when all is said and done. As a rule of thumb, a good way to prevent bad debt is to avoid putting anything on a credit card that will be long gone before it’s paid off.
On the other hand, going into debt to purchase something that has the potential to grow in value is considered good. Taking out student loans to earn a degree and increase your earning potential, for instance, is often considered good debt. Likewise, taking out a mortgage to buy a home is typically considered good debt. Not only does real estate generally increase in value over time, but homeownership comes with financial perks like tax advantages.
But what about debt accrued for items that seem both good and bad? Take a car loan, for instance. Vehicles rapidly depreciate in value, which makes an auto loan seem like bad debt, right? But, if you’re living in a city without mass transportation like many of us in Florida, a car is often necessary in order to get to and from work so you can earn a living. This is just one example of debt that’s in the gray area between good and bad. The best way to approach this type of debt is to be conservative and buy only what you can afford.
Need help managing debt?
A MIDFLORIDA Relationship Banker can help assess your financial health and suggest methods for improvement. Steps like creating a budget that includes putting aside funds into savings can also help prevent future debt. Visit a branch near you to learn more.