Feb
2013
Is There Such Thing as Good Debt?
“Debt” is a word many of us have learned to fear. But having debt, to a certain degree, is not always a bad thing. There is such thing as good debt versus bad debt, and you may be in a position to put your mind at ease if your debt falls into the positive category.
It is said that your total debt should not exceed 36% of your total income. For many, that might be a hard percentage to stay within, but not if you aim for good debt. Good debt is the debt you build up through credit cards, loans, or other financial means, to pay for things you need but can not afford at the moment and that won’t wipe out your cash reserves. It is about having the means to pay off the debt amount over time without putting yourself in a hole.
Bad debt is when you head out with your credit card to buy things you want but don’t really need, like that two week hotel stay or a new surround sound system for the living room.
So what are some good examples of good debt? Investments in the future, for one. Paying for a home or covering tuition costs for college are all worthy reason to take out a loan or make monthly payments on a mortgage. Financing a car is another good debt move, but only if it is a means of transportation you definitely need.
It is important to sit back and think about what you are about to spend credit on or take a loan out for, and make sure you’ll have the means to pay it back without hurting yourself in the long run. As long as you are responsible, debt can be a good thing!
Jon Rhodes
February 4, 2013 at 12:41 pm (106 days ago)Yes I agree there are times when it is very prudent to borrow. From an entrepreneurial view point you could for example borrow 50k for advertising, and this leads to a 10k per month increase in profits. That would definitely be a good move. On a personal level you can also invest in yourself with things such as education, gym membership etc. So I would agree that you shouldn’t rule out borrowing in some circumstances.
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Ted Jenkin @ Your Smart Money Moves
February 4, 2013 at 7:02 pm (105 days ago)I don’t think there is such a thing as good debt. If you have to take debt, current mortgages with low rates that offer you a current tax deduction is best kind of debt, but there is no such thing as good debt. Find me one person who gets excited to go to work every day just to pay the very obligations that hang over their head. We’ve built too much of a no money down society and this is part of our problem today. Pay ALL of it off as quickly as you can!
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Mary Rhodes
February 4, 2013 at 9:28 pm (105 days ago)I think it’s all reletive to your financial situation. If the debt is a way of improving your prosperity (eg: a purchase of an investment property then that in itself can be classified as good debt as well.
Edward Antrobus
February 4, 2013 at 11:48 pm (105 days ago)I do think that there is good debt, but I think it can be hard to properly identify in advance. A lot of times, a debt that seems like a good investment for the future can turn sour and then simply be an anchor weighing you down. Getting loans to pay for college seemed like a good idea at the time, nearly 4 years after graduating, I’m not doing anything remotely related to my degree other than still paying for it.
A house can seem like a good investment in your future until your situation changes 9 months later and you are forced to sell at a loss.
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Andrew
February 5, 2013 at 3:01 am (105 days ago)I have a different definition of “Good Debt” if you borrow money in a responsible way then it is good debt for example if you borrow money for an investment that will generate a higher profit than it will cost. Additionally you must be reasonably sure that you will get this profit. So borrowing money to buy essential expenses such as a car would not be good debt, unless having the car would help you generate more money than it would cost.
Essentially you weigh up the risk and reward of the debt to evaluate if it is good or bad.
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Michelle
February 5, 2013 at 7:57 pm (104 days ago)I think there is such a thing as good debt. It all depends on how you flip it to make it a positive for yourself.
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