Today it is possible to get almost everything on credit or through loan whether it is something as small as grocery or as big as a car or a home. People can even take loans to fund their education or fulfill their personal needs. Sometimes, in order to avoid debt people either do not buy what they need or they use their investments to buy it. While it’s possible to live completely debt free, but it’s not necessarily a very smart move.On the other hand there are people who buy even the smallest things (grocery or mobile phones etc.) on credit or on loan. When I talk to these people around I often hear them saying that they cannot save money because a major part of their income is being spent on debts or loans.
The extremes of anything are bad!!! Whether you are focusing on not having debt at all or getting out of debt you have accumulated you need to understand the debts that are good for you or bad for you.
GOOD DEBT – BAD DEBT
A debt which is used to finance something that will increase in value and can contribute to your overall financial health, then the debt is a good one. For e.g. a home loan or a business loan or an education loan
A debt which is taken to finance something that would be consumed, then you aren’t accumulating a good debt. For e.g. credit card bills of purchases you do not need or debt taken to fund a vacation or otherwise
GOOD MAY BECOME BAD
The above definitions only define the debts in general parlance. However, a debt is good or bad depends majorly on your financial health and how you manage them. There might be times when even good debts may become bad and can derail your finances.
For instance, taking a home loan to buy a house is certainly a good debt as value of the house appreciates in long run. But taking a loan to buy a home which you cannot reasonably afford or taking a loan to buy a rental property at the cost of your other goals or when your own finances are not in order is a bad-bad debt. Similarly, education loan is a good loan as it would help you acquire the potential to make money over lifetime. But taking a loan to fund a course that would add no value to you, certainly makes no sense. Hence one cannot blindly take a debt because it is labelled as a good debt.
AVOID WHEN YOU CAN
It’s a good practice to avoid when you can. Remember if you are thinking of taking a loan to buy something you want but do not need can even be funded by your own money. For instance, taking a loan to buy a car just because you want it or for funding a vacation are some of these loans which you can certainly avoid. Save for them and get them.
In the end it is you who has to figure out what’s good and what’s bad based on what’s important to you and what you can afford. Remember, debt is a scary monster that can give you sleepless nights and keep you worried every time.
Commit to debt that’s good for you!!!