We’re conditioned to think of all debt as a negative concept. After all, owing money to other people is just a form of losing money, right? The idea that any debt might be considered “good debt” can be a difficult concept to wrap your mind around. But the truth is, good debt is very real and can actually be very helpful.
How can any debt be considered “good”? Fortunately, good debt isn’t a complicated construct, some people just aren’t aware that it exists. Continue reading to learn more about the difference between good debt and bad debt.
Separating good debt and bad debt
What are good debts?
Good debts are assets that appreciate—or go up in value—over time. They are also debts that earn you money in the long run.
A common example of good debt is an investment property. This is considered good debt because it has the potential to increase in value over time. Also, if the investment property has renters living in it, the costs of that investment property mortgage can be covered by the income it’s generating and ultimately not cost you any money.
What are bad debts?
Bad debts are assets that go down in value—or depreciate—over time. They are a sunk cost and provide little if any return on investment.
In our everyday lives, most of the debts we owe are unfortunately bad debts. These could include a higher purchase loan for a car, credit card debts, student loan debt, and more. Bad debt can quickly spiral out of control, making it difficult to invest in good debt.
Can debts be both good and bad?
Your family home can be considered both good debt and bad debt, as it crosses over both categories. It is considered good debt because it does increase in value over time, but it is mainly considered bad debt for a few key reasons. Until you have paid off some of your mortgage to have equity in your home, you may find it difficult to further invest in more property opportunities. Additionally, until you sell your home, you’re not earning money from it. Your home is mainly costing you money while you’re paying off your home loans.
Make the most of your debts
If you would like to learn how you can invest in good debts, or you’d like to learn how you can better control your bad debts, contact the Rethink Group today.