The Difference Between Good Debt and Bad Debt

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Good Debt

 

For most folks one of their primary goals is to be Debt Free.  With that said, there will be times when it is appropriate to borrow money.

Good Debt is borrowing to purchase a home. If managed appropriately, good debt is also used to pursue higher education. Repeat, if managed appropriately.

 

Keep in mind that housing prices are cyclical. Additionally the economic meltdown of 2008-2009 damaged a lot of homeowner’s balance sheets. With that said for many Americans owning a home makes a lot of sense over a long period of time. To make this happen generally a mortgage will need to be taken out. If you rent an apartment then all you end up with is a cigar box full of rent receipts at the end of the year. Renting may make sense over a shorter period of time. In my opinion, long term renting is not the way to go.  Face it, you have to live somewhere. Hopefully it’s not with your in-laws.

Higher Education is a little trickier. Generally speaking the more education you have the more doors are open and there is more opportunity for upward mobility.  With that said, there are a lot of recent college graduates living in their parents’ basement working part time at the local mall. That hurts.

Parents and their children need to have clear plan as to how college is going to be paid for. Hopefully the parents have saved something for college. This still however may not be an easy discussion. According to the College Board the cost for an out of state student attending a public school in 2014 was approximately $33,000. The cost of attending a private school was approximately $42,000.  Additionally not every kid graduating high school is destined to go away to college. That’s fine. Generally the local Community College offers a wonderful opportunity for students at a cost that is incredibly inexpensive. Locally here in Connecticut a number of students attend Manchester Community College. Finally, some students should look at attending trade school.

 

Bad Debt

 

I believe all other forms of borrowing are bad debt. This includes:

* Car Loans
* Credit Card Debt
* Personal Loans
* Pay Day Loans
There may be times when you’ll need to take on some bad debt. That’s fine. Get it paid off as soon as possible. Generally the interest rate on these loans is higher. Additionally there is no income tax deduction for this interest.

 

 

 

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