Bad vs. good debt
Though one cannot avoid acquiring a debt, it is still very important to know your limits, and you must exercise complete restraint in using your credit cards or borrowing money from lenders.
There are people who would rather pay up front for something they want provided that they can afford it easily, but there are times when you need to purchase something and do not have the money to pay up front. This is the time when we go into debt. The larger the item is, the longer we have to pay for it.
If you have the money to pay for what you need up front, then owing a debt is not a problem. These situations include paying the rent or school fees. Buying used cars rather than buying a brand new one can also help decrease your debt. Let us take a closer look on why this is so. If you purchase a brand new car, it depreciates the moment you take it from the dealership’s parking lot. When you do think about selling your car, the money you will get from it is much lower than when you first bought it. It will not even help pay for the loan you acquired to purchase it in the first place. It might necessitate you to acquire another loan just to pay off the first one, thus, pushing you deeper into debts. There are those who say that a car’s value would go up again in time. I say this is wishful thinking. But it might happen, if you wait for decades. Buying a brand new car is just an example of a bad debt.
Another example is purchasing new model cell phones. Every year cell phone companies develop newer and more modern cell phones. When you sell your cell phone to secondhand stores to buy the latest model, it will never be enough to cover the expense or even help pay for the latest model you want.
It is wise to avoid buying something that depreciates in value over time, instead try to invest your money in bonds, buy lands or invest in gold because this can appreciate over time.
However, good debts are those items that appreciate or its value increases over time. An example of this is the college loan. A student will decide to work first then study later to avoid owing a debt. If a college-graduate individual earns about $50,000 ($25/hr) yearly and a student who worked first before going to college earns $20,000 ($10/hr) yearly, is not $30,000 yearly a big difference? If you get a student loan to finish your college, once you land a job, would not the additional $30,000 yearly help pay the loan much quicker? If you delay finishing college, you are losing about $30,000 yearly.
Buying a house or renting? The main advantage of buying a house instead of renting one is the additional equity you earn after paying off the house loan. Furthermore, as real estate properties generally increase in value, you can make a profit on your investment should you decide to sell your house. Now renting, on the other hand, is not an investment. After paying rent for about 10 years or 25 years, you still would not own the house. Furthermore, you do not qualify for any tax deductions if you are renting a house as opposed to having a tax-deductible loan. So, in the long-term outlook, deciding to apply for a loan to buy a good property is a good long-term strategy.
So, between these two, the good and bad debt, always consider the long-term repercussions of your choice.
Article by Nakagava Ltd., creator of PiggyBob™, the first truly user friendly personal finance and appointment scheduling software. PiggyBob™ is an extremely convenient tool to help you keep track of your income and expenses, plus a very useful printable calendar to record all important events in your life.
