Good debt vs bad debt: Understanding the difference 🤔
When it comes to debt, not all types are created equal. You may have heard the terms "good debt" and "bad debt" before, but what do they mean? And more importantly, how can understanding the difference help you make smarter financial decisions?
Here we'll explore the concept of good debt vs bad debt and provide you with insights to make informed choices about borrowing money.
What's Good Debt? 🌱
Good debt is borrowing that leads to making more money. It can boost your long-term finances, grow your net worth, or increase income. It's usually smart since the benefits are higher than the borrowing costs. Check out these examples of good debt and why they're worth considering:
Home mortgage 🏠
A mortgage lets you buy an asset, which usually increases in value. As your home's worth rises, you'll score gains on your investment. Owning a house also unlocks tax breaks like mortgage interest and property tax deductions, trimming your taxable income. Finally, paying off a mortgage helps you stack up equity in your home, which you can use for other investments or goals.
Student loans for brain gains 🎓
Student loans can be legit if they fund an education that lands you a fat paycheck or boosts your earnings. Higher education often leads to better gigs, career growth, and job security. Some student loans come with flexible repayment plans, deferment or forbearance, and tax-deductible interest, making them easier to handle than other debts.
Business loans💼
A business loan can kickstart or level up your venture, increasing your income and financial success. Borrowing to invest in your business can help you take advantage of growth opportunities, dominate the market, and create jobs. In addition, you can write off the interest on business loans against your taxes, which helps cut down your overall tax bill.
Investment property loans for passive income 🏘️
Real estate investment loans let you scoop up rental properties, which can generate passive income and grow your wealth. Investment properties can gain value, meaning you'll cash in when you sell. Interest, maintenance, and property management expenses for investment properties are usually tax-deductible.
Low-interest loans for asset investments 📈
Borrowing at low-interest rates to invest in assets like stocks, bonds, or mutual funds can lead to higher returns, making up for the borrowing costs.
Good debt can help you crush your long-term financial goals and elevate your money game when used wisely. But always weigh each type of good debt's risks, costs, and benefits to ensure it fits your financial objectives and risk appetite.
What is Bad Debt? 🚨
Bad debt is like borrowing cash for stuff that won't benefit your finances, grow your net worth, or might even lose value over time. In addition, it's often got high-interest rates and lousy repayment terms, which can mess up your finances and keep you from hitting other goals.
Check out these examples of bad debt and why they're a no-go: