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Good Debt vs Bad Debt

Not all types of debt are created equal.

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What do you think of when you hear the word “debt”? Crushing credit card bills? Guilt? Major purchases like cars or homes? When it comes to financial debt, the word means different things to different people, and not all types of debt are created equal.

Some people will tell you that all debt is bad debt, and to a degree, they are correct. If I could wave a magic wand and eliminate all of your debt, I would, and you would be in a better financial position. However, with that being said, some types of debt are definitely better than others.

Let’s start with the types of debt I typically advise people to avoid. First and foremost is credit card debt. Typically high-interest and often indicative of poor spending habits or living beyond your means, credit card debt is almost never a good thing. Pay off those balances each month to avoid interest and build a little credit.

Second, it’s wise to avoid too much debt on items that are likely to depreciate in value. The prime example here is cars. I know it’s fun to have something shiny and new sitting in the garage, but cars are rarely a good investment, and carrying a lot of debt on one is usually a losing financial game.

The third type of debt I steer my clients clear from is debt with variable rates, or balloon payments. While these can have their place, there’s usually a better way to finance a purchase, if that’s necessary.

Now, the good debt. Long-term debts with low, fixed interest rates certainly can be wise financial moves. A mortgage (on a home well within your means of course!) with interest such as today’s low rates is nothing to stress about, debt-wise. Especially if your home was purchased at a fair price and can be expected to increase in value, this type of debt can be good for your long-term financial health.

Second is debt that increases your earnings potential, usually in the form of student loans. Just as with a mortgage however, I advise my clients to make sure the amount of the debt is reasonable in relation to how much more you can expect to earn. Taking on six figures of student loan debt only to bump your salary by a few thousand dollars doesn’t make much sense.

If you’re struggling with debt, or are considering a major purchase such as a car or home, or are thinking about student loans for you your children, please, give me a call. Our team is happy to take a look at your current financial situation and create a plan that’s tailored to you.

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