Debt today is so common, you might say it can’t be avoided. Most people are not in a position to purchase a house or car for cash, while those who can buy such things outright may prefer to finance and keep control of their capital.
The truth is, while most of us see debt as a bad thing, any money borrowed to generate income or increase net worth can be considered “good debt.”
If the amount borrowed is invested for an overall gain, the debt is a tool. Borrowing to further your education, for example, is good debt since an education generally increases the likelihood you will earn more in the future. Most often, too, the interest paid on this type of debt is tax deductible.
Examples of Good Debt:
This is not to say good debt is without risk. If you take out a leverage loan and your investment fails, you will find yourself owing the borrowed amount plus interest, regardless. Real estate markets can fall, businesses often fail, and there are no guarantees that an education will result in higher income or stable employment.
With that in mind, it is important to think about insuring your loans to protect your family and estate from unwanted liabilities if you die, become critically ill, or disabled.
Unlike good debt – borrowing to acquire assets that are likely to increase in value – bad debt is incurred when we purchase assets that will decrease in value. Some examples:
In between good debt and bad debt lies the consolidation loan. Although it is used to merge all “bad” debts, it makes the burden easier to bear by lowering interest costs and monthly payments.
Get Rid of Debt!
Two plans often recommended for getting out of bad and consolidated debt are the debt snowball method and the debt stacking method.
Debt Snowball Method
Debt Stacking Method
Whichever strategy you use, make sure non-deductible-interest debt is paid off before you tackle the “good” debt.
Anyone concerned about debt load is well advised to seek the advice of a qualified financial planner who will help develop an action plan and recommend risk-management steps. As a qualified planner, I would be most happy to assist you in your debt-management efforts. Please feel free to call me at any time.