At least once in everyone’s life, they’ll wonder, “can someone pay off my debt so I can just be done with it?” Obviously, debt is a burden for many that makes life harder and is a constant reminder of your financial situation, but did you know that some debt might be beneficial for your financial health? Here’s what you need to know about good and bad debt and when it’s in your best interest to stay in debt.
Good debt vs. bad debt
There’s good and bad debt, and it’s important to distinguish between them. Good debt is credit that you use to purchase assets that will contribute to your wealth, such as a home or continuing your education. The idea behind taking on debts like this is that over time, they’ll increase your net worth and earning potential; therefore, it is “worth” the burden of taking on now.
On the other hand, bad debt is credit that you use to purchase items that won’t have a long-term impact on your financial stability, such as groceries or clothes. These purchases are more likely to lead to financial stress and difficulty paying off the debt, especially if they’re carried over from month to month.
When is it in my best interest to have good debt?
A few factors determine when it’s better for you to have good debt: your income, your debts, and your goals. Each of these factors is linked to one another, so you must consider them all part of the same financial ecosystem.
When it comes to your income, taking on some good debt can help you afford larger purchases or investments that will boost your net worth. Similarly, if you’re working towards saving for a long-term goal – like retirement – taking on some good debt can help speed up the process. Getting a mortgage on a home would be seen as “good” debt in this scenario because the more you pay it off, the more equity you’ll accrue in your house. You can then use this equity to increase your net worth, sell your home for a profit, and move into a smaller place during retirement that lets you live off the profits.
Like your income, your debts must align with your goals. For example, if you’re saving for a long-term goal like retirement, it’s fine to have lower-interest debt like a mortgage or car loan instead of higher-interest debt such as credit card debt.
However, if you’re working towards accumulating more short-term debt (like groceries or entertainment), reducing your interest rates and/or taking on smaller loans that will be paid off quickly is more likely to help you reach your goal faster.
Finally, it’s essential to keep in mind your goals and how debt can be used to achieve them. For example, if you’re currently stuck in a dead-end job, investing in your education could give you the opportunity to find a better-paying job in the future. Taking on some good debt to cover tuition costs or living expenses while you’re studying might make sense as long as you have a plan to pay it back quickly once you’ve graduated and landed your dream job.
The bottom line
When considering whether or not to take on good debt, it’s crucial to consider all of the above factors and figure out what’s best for you. Don’t be afraid to ask for help from a financial advisor or other professionals who can give you unbiased advice about what kind of debt is right for you.