For many of us today, debt is just a fact of life. It’s how we pay for just about everything from the homes we live in, to the cars we drive and even down to the small, day to day purchases like food, gas, that daily cup of coffee (or two, or three), etc. No matter how debt is used or what it is used for…simply put, debt is an amount of money borrowed by one party from another that needs to be paid back. Based on that explanation, debt may not sound good or bad. We need to understand that there are different types of debt and that not all debt is considered equal. The reality is that there is a difference between good debt and bad debt. Although there is some debate about what those differences are, the bottom line is this…good debt puts money in your “pockets”, where bad debt takes money out of your “pockets”! And there are many instances where there is a fine line between the two. Let’s take a closer look and hopefully shed some light on this subject.

Is the Debt You Have Good or Bad?

You may have heard that not all debt is the same and there’s a misconception about what you might consider good debt, when in reality it may be bad! Bad debt is usually obvious and sometimes it’s not. So, what is bad debt? Let’s break it down…bad debt is money you borrow to pay for something that will not increase in value and/or not pay you back after you make the purchase.

A prime example is using a credit card to pay for that round of drinks just to impress friends. Another example would be a car loan. Vehicles lose more than 50% of their value within the first five years. Even taking out a mortgage to buy a primary residence can be considered bad debt! Until you’ve completely paid off the mortgage and sell the house for more than you paid for it, it’s bad debt.

“Good debt is a powerful tool. But bad debt can kill you.” – Robert Kiyosaki

Even after the mortgage is paid, there is always maintenance, up keep and property taxes…money coming out of your pocket, right? Although the price of real estate historically goes up (if you hold on to it long enough), hopefully you can sell it for more than you paid for it, including all the money spent during the years for maintenance, up keep and property taxes.

Now, I’m not saying don’t ever buy a house, but for the sake of understanding the difference between good debt and bad debt and the fine line between them, this is definitely food for thought. Understanding the basic principle for what bad debt really is will help you to recognize that good debt isn’t always what it seems. It’s with that understanding that you can properly assess your financial well-being.

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