Not All Debt Is Bad-Good Debt
It’s easy to hear the word “debt” and immediately think it’s a bad thing. After all, owing money to a lender might not seem like something that has many benefits attached to it. However, it’s important to understand that not all debt is considered bad. Some of it is actually good, and can be a smart investment in the long run.
What Qualifies As Good Debt?
Good debt, in simple terms, is something that creates value. Some good examples of what would be considered good debt include real estate loans, student and business loans and mortgages.
Robert D. Manning, finance professor at Rochester Institute of Technology advises taking on good debt that was either tax deductible or eventually created wealth.
“If you are talking about reducing current debt, that’s where it starts to get nuanced,” Manning said. “If you take a home equity loan because you have 17 percent credit card, and you go with a 6 percent loan that’s tax-deductible, that’s good debt.”
Mortgages Are Good
Perhaps the best kind of debt there is a mortgage. This is because when home values increase, it builds value on your mortgage and can ultimately build wealth.
“Home values have increased an average of 6.5 percent a year over the past 30 years,” David Bach, CEO of Finish Rich, Inc., said. “So when you borrow to buy a home, chances are that’s good debt. You’ll build value.”
Bach said that best way to build wealth in America is, without question, to become a homeowner, saying that about 40 percent of citizens are renters. Owning a home, he added, is the quickest way to build wealth.
“The average renter has a median net worth of $4,000, and the average homeowner has a median net worth of about $150,000,” Bach said.
The Risks Of Good Debt
Though debt that’s considered good has a decent chance of ultimately creating wealth, there are risks involved with debt of any kind. Mainly, it’s important to understand that sometimes things just don’t work out the way they were intended to.
Student loans, in particular, don’t always pay off the way they were meant to. Though higher education is important for young people, it’s never a guaranteed ticket to a successful career. This is also dependent greatly on economic conditions, due to the fact that it’s often harder to get a job during an economic downturn.
The same can be said for things like business loans and investments, as there’s simply never a guarantee of success. In regards to starting a business, it’s important to have a concrete plan of action and work hard towards success to ensure that your loan eventually pays off.
When you think about debt and what it entails, remember that it isn’t always a bad thing. If you go into debt for something that can ultimately create wealth, you’ll be making an investment in your future.
Try to avoid getting into a debt trap by taking out lines of credit and spending it on things that won’t benefit you in the long-term. Rather, get a mortgage or pursue a college education and you’ll be on your way towards making sure your debt pays off for you in the end.