Many people think that all debt is bad and should be avoided or paid down as quickly as possible. However, you should break down debt into two types: good and bad. It’s essential to understand their differences so you stay away from bad debt as much as possible and leverage good debt when it can help you.
This post will cover the differences between good and bad debt and some practical examples. Plus, I’ll review seven simple steps for paying off your debt as quickly as possible. Understanding these concepts will help you save money, build your net worth, and create more financial security for the future.
Examples of good debt
One way to know if a debt is good or bad is to ask yourself if it pays for something that will appreciate or depreciate over time. If you use debt to finance an asset that can or should increase in value, it’s typically good. And debt that finances something that loses value is terrible.
Good debt is good because it can increase your net worth or wealth over time. One example is a home mortgage, which allows you to purchase an asset that typically appreciates over time. While there’s no guarantee that your home will be worth more in five years than today, in general, real estate appreciates about 3% to 5% per year.
In 2021, there are parts of the country that have seen home prices rise 20%! But it depends on where you live and the features of your property. Plus, mortgage rates are at historic lows, making them one of the least inexpensive debts to repay.
A certain amount of interest you pay on mortgages and home equity loans is tax-deductible, making them cost even less on an after-tax basis. The combination of benefits makes getting a mortgage for an affordable home one of the best possible debts.
Another good debt is a loan for a college education. While a student loan isn’t backed by an...
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