Some of us are excellent at spending money. Unfortunately, we are building up a lot of debt along the way. Personal debt is rising at an alarming rate because getting credit is just too easy.
It is a known fact that too much debt leads to financial ruin. But one thing to remember is that even though nobody likes to have debt, some of these can be considered ‘good’ debt. Bad debt is easy to define – it is debt that does not financially benefit you.
Most debt is bad debt; they enhance your lifestyle, not your wealth. Money that is borrowed to purchase luxury items such as cars, vacations and furniture are classic examples of bad debt.
Some examples of bad debt
High interest debt – when it comes to borrowing money, most people want too much, even though they can’t afford it. They fail to realise that with borrowing money, comes repayments and high interest rates. Credit cards usually have exorbitant interest rates, which cause people to fall into financial difficulty, possibly worse than before.
Car debt – The thing about cars is that many people believe it is an investment. Cars are not investments; investments are purchases that will benefit you financially in the future. Cars depreciate in value, which means you are losing money, not gaining it. Soon you will be paying more money on maintaining your car than you will get out of selling it in say 5 years’ time.Good debt is debt that is financially beneficial to you. This increases opportunities for financial growth.
These debts include the following:
Mortgage – Mortgages are generally used to buy a property. This is a great example of good debt as property appreciates in value with time.
Education – Investing in your own or your children’s education can be a very rewarding experience, not only financially, but in a personal capacity as well. Investing in education will bring great opportunities to earn more income and improve your finances.
However, minimal debt is your best option for financial freedom. Remember that even good debt can be destructive if you have too much of it. An example would be people struggling to pay off a student loan long after graduation, or someone who have invested money in a business that went bad. Believe in moderation; it is the key to a financially prosperous future.