Americans know all about debt, our country is in debt, our companies are in debt and then we have personal debt. We’ve taken debt to extreme levels and it has been a contributing factor to our current economic situation. So why do we borrow money? Originally you would borrow money if you did not have enough to pay for something you needed such as a house or college. However many people have taken to financing or borrowing money for things such as consumer goods, motor vehicles and just about everything. Personally I’ve watched people put coffee on their credit card, snacks, and food. Today many people have taken to putting everything on their credit card and paying off the balance but that is not always the case.
Have you ever heard someone call your car an investment? How about your house or a Stock? What exactly is an investment; versus what are you just spending money on with no return? This article addresses good versus bad debt.
When I pull up to the car wash the sales person at the front always attempts to up sell my desire to simply wash the vehicle. I often get the sales pitch “Don’t you want to protect your investment?” It’s a common sales pitch and I’m sure the car wash is not the only place to use it. Your vehicle is an example of a bad debt, and is therefore not an investment. Generally investments increase in value over time, a vehicle does just the opposite.
So what is good debt, and what is bad debt?
Any debt used for immediate consumption is bad debt, and if not dealt with correctly can have negative impacts on your long term financial health. You should pay attention to the interest rate on the debt; Bad debt tends to have a higher interest rate, whereas good debt comes with a lower interest rate. A comparison can be seen with credit cards verse a mortgage. A Person can expect an interest rate between 10%-25% on a credit card depending on their credit score. However, the same person can expect a rate between 4%-8% on their mortgage. Good debt is debt in things such as a house, a business, or schooling. These types of debt tend to increase in value over time and often have a return on the investment that you put in.
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