Sometimes, people make the mistake of thinking that all debt is bad. While it would be nice to be able to live without any debt at all, for most people, that isn’t a reality. What is important to understand is that there is good debt. Not all debt is a negative thing. Propel Your Accounting is here to explain the difference between good debt and bad debt.
Why is Debt Good Sometimes?
If you are like most people, you have financial goals that you are trying to meet. Some financial goals might include owning your own home, paying for an education, or even starting a business. Most of these financial goals require money to reach them. Debt that helps you attain these goals is considered good debt. One thing that is important to remember is that part of what makes debt good or bad is the way that the debt is managed. Following are some examples of good debt:
– Mortgage: when you take out a loan to purchase a home, it is constantly earning equity which helps increase your net worth.
– Student Loans: Getting the funds needed to finish your education is a form of good debt because your education is what will help you get employment and increase your earnings.
– Small Business Loans: Starting your own business is going to require financial help. Loans that help you get started can be beneficial in helping your income.
– Personal Loans: Some personal loans are considered good debt because they can help you consolidate debt and pay them back with a lower interest rate.
How to Explain Bad Debt
It is vital that you understand what makes debt go from good to bad. Whenever you are taking on more debt, you need to make sure that it is going to be working for you. It needs to be helping you put more money in your pocket, not less. Something that should always be considered before taking on any new debt is your debt to income ratio. This is the money you earn relative to the money that you owe. Some examples of bad debt include:
– Payday Loans: These loans generally have high interest rates and are due as soon as you get your next paycheck. People get into serious financial trouble with this type of debt.
– Unaffordable Debt: This is where debt to income ratio comes into play. If you can’t afford to pay back the debt, you have no business taking it on in the first place.
– Negatively Impacts Credit Score: Your credit score is an important number. It gives you the freedom to borrow money when you need it. Debt that is going to have a negative impact on that number shouldn’t be something you take on.
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If you are concerned about your financial future, you can turn to Propel Your Accounting to help. We will help you reach your financial goals. Call us today!
