Welcome to understanding debt! Here's a surprise: not all debt is bad for your financial health. Some debt can actually help you build wealth over time.
The key is learning which debts help and which ones hurt your net worth.
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In one word, how do you feel about the idea of 'good debt'?
Good debt has three characteristics: it helps you earn money, builds wealth over time, or has tax advantages. Think investment properties, education, or business loans.
Bad debt drains money from your pocket with high interest and no lasting value.
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Can you think of a loan that might actually make you money?
Mortgages are classic good debt. Yes, you pay interest, but you're building equity while having a place to live. Plus, mortgage interest is tax-deductible.
Over time, your home may appreciate while you pay down the loan.
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How does owning property help build wealth differently than renting?
Student loans can be good debt when they increase your earning potential. A degree that boosts your salary by $20,000 yearly pays for itself quickly.
However, $100,000 in loans for a $30,000 career isn't smart debt use.
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What makes the difference between smart and unwise education debt?
Credit card debt is typically bad debt. High interest rates (often 18-29%) eat your money while you bought items that depreciate or get consumed.
That $1,000 dinner vacation on credit cards becomes $1,500+ with minimum payments.
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What purchases on credit cards lose value immediately after buying?
Auto loans fall into a gray area. Cars are necessary for many people to work, but they depreciate rapidly. Keep car loans short and reasonable.
