Good Debt versus Bad Debt

Good Debt versus Bad Debt

GOOD DEBT VERSUS BAD DEBT

Making and spending money isn’t bad, it’s your relationship with money which will define your financial health. When it comes to debt it’s important to understand the difference between good debt and bad debt. So if we take a closer look at the subject it will help us to better understand when it is a good time to take out debt.

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This is when you loan money in order to generate more money or to help increase your net worth. There are four very good examples below:

EDUCATION

Furthering your education puts an individual in a position to earn a higher salary, get a better job or secure employment. Most educations will pay themselves back in a few years and in a lifetime can give a return on investment worth hundreds of thousands of pounds.

OWNING YOUR OWN BUSINESS

Loaning money to start a business can earn you more money in the future and as an added bonus you can enjoy the rewards of being your own boss. In addition the benefit of not having to rely on a third party for your salary and the motivation to work harder are also worth the loan.

REAL ESTATE

It goes without saying that purchasing your own property living in it and selling it years later at a profit is a huge motivation to loan money and can be a very profitable transaction. In addition you can also generate income by taking in renters or renting an entire property.

INVESTING

Stocks, bonds, commodities, precious metals and other long and short term investments are often the best way for individuals to generate wealth.

Remember however there are no guarantees, any debt can turn out bad and not all ideas work out as intended therefore even what seems like good debt at the time can result in being bad debt.

BAD DEBT

Here we will look at a few notable items which are just plain bad investments.

CARS

A lot of people need vehicles to get around, that is understood. But remember new cars are expensive. It’s the interest you pay on these vehicles that are a waste of money. In reality by the time car leaves the floor it is already worth less than when you bought it. Always try to pay cash rather for an old car, if you can’t try to find the least expensive reliable vehicle and pay it off as quickly as possible.

CLOTHES, CONSUMABLES AND OTHER GOODS AND SERVICES

Clothing, vacations, fast food, groceries and fuel are all items very commonly bought on credit. Every penny spent in interest on these items is money that could have been used more wisely somewhere else.

CREDIT CARDS

Due to the high interest rates and repayment schedules which are arranged to maximise cost to the consumer credit cards are considered one of the worst forms of debt. Having a balance on your credit card is never a good idea.

In a nutshell keeping your ego aside and paying cash for everything listed above is probably the best thing you can do and it will save you a lot of pounds in the future.

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