Personal Finance – What is Good and Bad Debt?
What is the difference between good and bad debt? Can they even exist this way? I thought debts were just debts, and nothing more. Debt is borrowed money. Everyone knows that. However, debts are essential in our lives. We all use them to our advantages. On the other side of the coin, use it too much, and it becomes a curse instead.
When we go to college, we might not have the large sum of money to dispose of. Therefore, the need for a loan is apparent. Loan, too, is a type of debt. In this case, debt is a good thing and it helps serve as the stepping stone in life. But what take a car for another example. Is it a good thing to get involved with a debt to obtain a car? As opposed to investing in yourself; an education, borrowing huge amount of money for buying a car can be a good or bad thing. It is a good thing if you are a salesman, needing mobility all the time. But it is a bad thing indeed, when you are buying that car just for satisfying your ego.
In a vacation, you would spend also, large sum of money. In financial terms, this is a huge waste. Yes, you will get nice and great memories, as well as unforgettable life experiences. But it is no asset in terms of business and money matters. This example can be an extreme case. Some will argue that having a holiday releases much stress and heals the mind.
In the end, the point is to do it when you can afford it. There is no use trying to splurge more than what you already spend or can afford. How is this relevant to debts? It is when you try to take a loan, or large portion of cash to go for a vacation or splurging moments. Enjoying on credit is definitely a bad debt, rather than a good debt. A good debt is like a college education. It serves you in the future.