Is there Good and Bad Debt? What is the Difference?
Well there is an old saying that you have to spend money to make money.
These days, it seems that debt is a necessary part of life.
There are essentially 3 types of Debt:
- Good Debt
- Bad Debt
- Necessary Debt
Good Debt is when you buy income appreciating assets (Business loans are also considered good debt as long as your business is making a profit).
Necessary Debt Could be a loan against your home or a Student Loan.
Bad Debts are Credit Cards, Car and Consumer Loans.
Good and Necessary Debt are an investment in yourself because you are borrowing money to create an income producing property or to pay for an education that will increase your capacity to earn.
Bad Debt is the kind of Debt that you want to minimize and eradicate as quickly as you can while you maximize your Good Debt, which is usually Tax Deductible.
The secret to dealing with debt is to minimize bad debt and pay it off as quickly as you can, whilst maximizing good debt and buy appreciating assets, (i.e. mortgage, business loans etc).
Always steer clear of questionable sources for loans like payday lenders and some finance companies.
Always pay off the balance on a credit card and try not to use it for things that depreciate i.e. clothes, consumables and other goods and services, if possible.
Few people can afford to pay cash for everything these days so with in mind, keep in mind the motto “Everything in moderation”, especially where debt is concerned.
Good debt can create wealth but too much bad debt will reduce it.
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