Nowadays, going through life without accumulating some debt and having to structure your finances around debt repayments is virtually impossible. This is not necessarily bad, but people must recognize the difference between good and bad debt.
Here we look at some significant differences to help you learn the difference.
Debt That Grows
Many experts agree that good debt can be described as any necessary debt expected to grow your income or wealth in the future and are sustainable. This can include anything from a mortgage to pay for your first home, a loan to pay for university education, or financial aid when setting up a new business.
All of these should be sustainable investments that enhance your ability to repay any debt accumulated in the process of achieving your long-term goals.
Emergency loans and payday lending are two of the most apparent forms of bad debt and are usually the result of poor financial planning and a lack of responsibility. They will often have large fees attached and make incredible amounts of interest payable, so avoid them if possible.
When used responsibly, these products can prove beneficial, but it is important that they are reserved for emergency use only and not used as part of your regular financial planning.
It is also a good idea to take a loan and accept some debt rather than start eating up your cash reserves. This is particularly true if your reserves are savings for the future, to cope with an emergency, or intended for your pension.
If you need professional help calculating your pension or any information on savings and pension schemes, visit Money Vista. In such cases, debt can be a good thing as it protects those important savings you’ve made for the future.
Finally, it’s usually best to consider the basic distinction between good and bad debt as to whether the debt is necessary. If you can do without the services and products a loan would pay for, then it’s probably best not to saddle yourself with that debt.
Conversely, if these services are essential to you and you consider them necessary, they may be seen as good debt.