Good Debt vs Bad Debt: What’s the difference?

You have probably heard people talk about good debt and bad debt. However, it’s easy to forget the difference when cash is tight, or your consumer desires get the better of you! So, here is a quick summary of what’s good, and what’s bad.

What is good debt?

Goods debts are debts that will most likely have a positive impact on your net wealth. In other words, they are for assets that will grow in value over time or generate future income. Examples include:

• Mortgage: when you take out a loan for your own home, you’re generally investing in an asset that will grow in value over time. For many households, their home is the most valuable asset.
• Investments: Whether it’s property, business or stocks, a carefully planned investment strategy can help you build long-term income-producing assets. That said, all investments come with risk, so it’s important to do your homework and obtain advice from qualified professionals.
• Education: Investing in your personal development is one of the best ways to progress your career and your earning capacity. This is demonstrated by the fact that university graduates have higher incomes than non-graduates.

What is bad debt?

Put simply bad debts are the opposite of good debts. They have a negative impact on your net wealth, and are typically for items that depreciate in value, have high-interest rates and generate no income. Bad debts also have a habit of spiralling out of control quickly. Examples include:

• Credit cards: As we move towards a cashless society, credit card debt is becoming more and more common. Putting clothing, food and meals, electronic goods or holidays on credit cards is easy at the time but can be overwhelming for many when it comes to the end of the month. If you’re going to use a credit card, only ever pay for what you can afford to repay at the end of the month.
• Car loans: For most, a car is an essential means of transport. But if you’re considering taking out a loan for a new car, just make sure you can comfortably repay the loan each month. Afterall, other than rare luxury sports cars, a car will decline in value as soon as it leaves the showroom.
• Pay day loans: Most people can be short on cash at some time in their life. But pay day loans should be avoided at all costs. They carry high-interest rates and if you miss payments it can lead to undesirable consequences.
• Borrowing against your mortgage: One of the most common ways people get stuck is when they borrow down on their mortgage to pay for personal luxuries like holidays. Whilst this is tempting, you’re better off saving for your holiday. You will feel a whole lot better when you get back.

Need some assistance?

So now you know the difference between good and bad debts, you should be able to make the right decision next time you’re faced with a purchase decision. If you’re looking for finance contact Ben McDonald on (03) 5331 3711.