Let's keep this simple. "Good" debt is an investment of money that grows in value or generates long term income. Two good examples are home mortgages and student loans. However, as a money coach, I often see destructive money beliefs highjack "good" debt.
• With mortgages, you're borrowing to own a potentially appreciating asset, and it may be tax-deductible. (As always, be sure to check with your tax advisor.) However, good debt turns bad if you buy a home with less than a 20% down payment and no savings account to cover unexpected maintenance, and trust me, you will have unexpected maintenance. You can be underwater fast if we have a real estate market shift. Remember the housing crisis of 2006-2008. Unexamined history will repeat itself.
• With student loans, benefits include enhanced career opportunities, which will increase your earning potential in the long run. However, good debt turns bad if you decided to take a semester off and use your student loan money to buy a new car or take your friends on a shopping spree. Yes, this happens!
"Bad" debt works against you from the onset, such as credit cards and long-term auto loans.
• Credit cards' high interest rates will cost you big over time. If you use them, you must pay them off every month so you aren't accruing interest and creating an emotional and spiritual death trap. Debt will hold you hostage for years at a job you hate or keep you in an unhealthy relationship. Bottom line: if possible, don't use credit cards. Cash is king.
• And lastly, buying a new car - you're borrowing on something that immediately loses value as soon as you drive it off the lot. It's the worst! A slightly used car, 2-3 years old, is usually more cost effective. And if you have to finance a used car, 3 year car loans are the maximum. If you can't afford the payment at 3 years, then you can't afford the car.
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