What is “Good Debt”?
Debt is something that is talked about frequently. There are many types of debt and they could include a mortgage, credit card, auto loans, student loans, and personal loans. This not a fully exhaustive list, but covers some of the more widely used types of debt. It is fairly common for most people to incur some type of debt over their lifetime and we want to explore whether or not “good debt” exists.
In my view, there certainly is a line of demarcation between “good debt” and “bad debt” and not all debt should be treated equally. Good debt would be debt that allows you to purchase something that over time will increase in value or be valuable over time by taking on the debt. Let’s focus on a few examples of good debt.
Obtaining a mortgage would be one of the most well-known forms of good debt. The mortgage will allow you to purchase a property or piece of real estate that you ordinarily would not be able to purchase without a loan. Most of us cannot simply pay cash for a home and a mortgage presents an opportunity for us to buy a large asset that we could not afford without and benefit from having a home, and an appreciable asset. It is important to make sure that you are not overusing leverage and taking out a mortgage that you cannot afford or one that is not the right loan for you and your family. Good debt can turn to bad debt if you have not planned appropriately for the loan amount you can afford.
A home equity loan or line of credit can be a good form of debt too. This is very similar to a mortgage and should be treated similarly. Using a home equity loan or line of credit to improve your home and its value is a good form of debt. You will want to analyze how the improvements will impact the value of the home at the cost of borrowing the money. Loans and lines of credit become troublesome when you tap into them and use the proceeds for things that will not increase in value, such as buying cars and consolidating credit card debt. You can certainly use this as a tool for these items, but you will want to be careful and be sure that you will be able to make the payments over time.
Student loans, if used properly, can be good debt as well. There are many instances where education can lead to higher-paying careers that otherwise would not be in reach. Taking on student debt for a career and pursuit of the right degree could be an excellent way to receive a better education and graduate with an opportunity to earn significantly more than you would have without it. It is important here to make sure that you are not taking on mounds of debt in order to graduate with a general degree with no path to a career with a significant income. This is where good debt can certainly turn bad and you can read about the Three Main Contributors to The Student Debt Crisis. It would be important to do a cost-benefit analysis of taking the loan versus a less expensive path to another career choice.
Debt is a financial tool that can be used for good or could be evil for your financial future. We discussed some of the more prevalent ways to use debt in a good way and we would be remiss in mentioning some of the biggest contributors to bad debt. Credit cards, auto loans, and personal loans can be some of the biggest examples of bad debt. These methods are either buying assets that have really no value or ones that will decrease in value the minute you purchase them. You should also read about the 5 Credit Card Myths Hurting Your Financial Future as this will also help you manage your debt appropriately.
Debt is something we will all need to utilize and manage at some point in our financial lives. It is key to learn how to appropriately use it and leverage good debt to your benefit. The earlier this is learned, just like many other financial concepts, the better off you will be financially. Just contact us, Mitlin Financial, at (844) 4-MITLIN x12 to schedule a time to review your own personal use of debt.
Be sure to share this article with friends, family and business acquaintances who might be interested too. We look forward to helping you, and them, get on the right path and stay there.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.