Good Debt vs. Bad Debt: What’s the Difference?
Debt is unfortunately something most millennials are all too familiar with. I’m not sure about you, but I didn’t learn much about personal finance and managing money in high school. I only took two math classes in college and neither of them taught me anything about managing money. We learned more important things that we would use every day like the quadratic formula for example. I’m glad that is working out for us in the real world (NOT!). I wish I would have learned about student loans and good debt during high school. This may have persuaded me to save more money before college or perhaps applied for more scholarships.
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I was so lost when I graduated college and had to start paying bills on my own. I had no money saved and I don’t want to talk about the amount of student loan debt that I had accumulated while pursuing two degrees. Learning things like this when you are miles away from home was a huge challenge. I began reading personal finance blogs and learning as much as I could about how to take control of my money. There was no reason that money and debt should be running my life.
Millennials like myself are having trouble finding our place in the financial world. The amount of money that entry-level jobs pay is not aligned with the cost of living. This is true even if we have a degree. It seems so hard to get ahead, which makes it seem like our only alternative is to go into debt. The important thing to remember when making the decision to take on debt is the difference between good debt and bad debt.
Good debt is considered an investment. This type of debt creates value and helps you get ahead in life. Good debt will help you make money in the long run. Bad debt is the purchase of disposable items. Bad debt is usually something that you can walk away with at the time of purchase. Using credit for durable goods creates bad debt. Bad debt tends to come with a high interest rate and does not produce a return on your investment.
Good Debt
With the rising cost of college, most students need to take out loans to afford the opportunity of higher education. While this seems like the system is flawed, do not be discouraged by taking out student loans. Student loans are an investment into your education and your future. I do suggest applying for as many scholarships as possible to help offset the amount of debt that you take on. I also encourage you to take out the amount of loans that you need, not the total amount offered. This will save on interest in the long run.
Purchasing a home is something that was a part of the plan for most millennials while growing up. Upon graduating college, this dream seems so far away. With the help of real estate loans, millennials will still be able to achieve their dream. Real estate loans are good debt because homes are an investment. The value of a home increases as time goes by and this is something that you can keep forever. You can even make money after the purchase of your home if you decided to rent it out or sell. It is best to save 20% as a down payment before purchasing a home but you may be able to get around this depending on your credit score and lender.
Lately, I have noticed that a lot of millennials have started or are in the process of starting a new business. I think this comes from us not being able to make the type of money that we think we should be making in the working world. A lot of people our age have incredible skills and would make much more money by capitalizing on these skills and investing in ourselves. Business loans are considered good debt. Be sure to research before starting a business. You should be sure that you will receive a return on your investment within a year or two.
Bad Debt
The first thing I wanted to do when I graduated college was purchase my first car. This was an exciting experience for me, but I went about it the wrong way. I put down a rather large down payment and also took on an auto loan. Don’t be like me. I paid off my car a few years ago but if I could do it again I would do it differently.
As tempting as it may be to drive around in the nicest newest vehicles, car loans are bad debt. A car is not an investment as it loses value the minute you drive it off the lot. An alternative to a car loan is to save up and purchase a “new to you” car that has been loved by someone else for a couple of years. This way, the original owner has taken on the depreciation and you can purchase the car with cash.
Another form of bad debt is credit cards. This includes store cards as well. I know a lot of people claim to use credit cards for the points and perks. This is fine, but let’s be clear that credit card debt is still debt. We won’t even mention the high interest rates.
The perks of having a credit card sound nice on the surface, but they are really a tactic to encourage spending. How many times have you purchased something that you otherwise wouldn’t have purchased to collect points? Credit card spending can get out of hand quickly, even if you think you have a grip on it. If you absolutely must use credit cards, be sure to call the company and have your spending limit lowered to discourage overspending. The rule of thumb here is: do not go into debt to purchase tangible items. Create a budget that allows you room to purchase these items with cash.
Conclusion
As you can see, the line between good debt and bad debt is clear. Ask yourself if your purchase is an investment before taking on any debt. If the answer is yes, take time to make plans for the funds and only borrow the amount that you need. If the answer is no, take time to save money, research, and shop around before making the purchase. Your goals may seem far away, but taking on bad debt will not help you reach your goals. Don’t forget to pay off any debt that you currently have and check your credit score regularly as well. This will ensure that you can take on good debt when the time comes.
**This article contains affiliate links, and we will be compensated for any purchase made by clicking on them. Thank you for supporting Miss Millennia Magazine!**
