Good Debt. Bad Debt.
What’s the difference between good debt and bad debt? That’s a tricky question. And it’s not always easy to tell which is which.
So, let’s start with good debt. Good debt is money you owe for things that can help build wealth or increase your income over time.
Sure, it’s still debt – but it’s also an investment in your future that pays you back in the long run.
- Like a student loan to open the door to a better career.
- A small business loan to get your start-up off the ground.
- Or a mortgage loan to buy an affordable house.
Then there’s bad debt. It’s best described as debt that isn’t strategic or helpful for your financial goals.
It can put a strain on your budget and damage your financial – and emotional – well-being.
- Such as taking out a loan with payments that stretch or break your budget.
- Maxing out high-interest credit cards with things you can’t afford.
- Or borrowing for purchases that are likely to lose their value along the way.
Ideally, you should only take on good debt. But, we know it’s not always that easy. So, finding the right balance is key.
The best thing you can do is set a realistic budget and stick to it. Knowing where you stand will help you make smarter choices.
Still have questions about managing your debt? Contact your local banker for more info and advice.
Not all debt is equal. Some kinds can help you, while others will only make life harder. And it varies from person to person.
Think of good debt as debt that can pay you back. It’s borrowed money that fits into a budget, helps you reach a goal and builds wealth over time.
- Student loans with low interest and affordable payments
- Small business loans that finance long-term goals
- A mortgage with an affordable payment
Think of bad debt as debt that does little to help you. It’s borrowed money that strains your budget, creates unaffordable payments and doesn’t help your finances long-term.
- Frivolous credit card purchases
- Loans with unaffordable payments
- Loans for purchases that lose value over time
This is a way of knowing your good to bad debt ratio. To find yours, subtract the value of your liabilities from your assets.
- Assets are what you own (houses, cars, stocks, savings accounts)2
- Liabilities are what you owe. This can be good and bad debt (think credit card debt or a mortgage)3