What Is Good Debt And Why Do You Need It
According to the Northwestern Mutual 2018 Planning and Progress Study, an average American has a personal debt of approximately $38,000. As a whole, the US consumer debt level surpassed $13 trillion in 2019.
Debt is something that no one wants to be in, but ironically, it is one of the factors that influences your credit report favorably. Your credit history is one of the most important things that allow you to purchase big-ticket items like cars and houses. It is an indication of how well you have handled debt in the past, so naturally, you would have had to have had a debt to have handled debt!
However, there is a need to distinguish between “good debt” and “bad debt”. Needless to say, the kind of debt that you should have is the “good” one, so before you start taking out loans left and right, you should know which one is which!
What Is Good Debt?
In the simplest terms, good debt is debt that helps add value to your life. These could be debts taken out to help increase your income (directly or indirectly) or your overall net worth – they are investments into your future. These are the debts that you want to take on. Here are some examples of good debt:
Student Loan Debt
Student loan debt is one of the most common and well-known types of good debt. Tuition costs have been on a steady uprise, but taking a loan to go to school is considered a good debt because it is an investment in your future. Having a Ph.D., degree, diploma, or any course increases the likelihood of you qualifying for higher-paying jobs later on.
Student loans are the ideal good debts, especially because they have lower interest rates, are tax-deductible, and also come with a variety of repayment plans. Some federal student loans may even be subsidized! To keep student loans from turning into bad debt, make your payments on time, and pay the loan back as soon as you can.
Small Business Expenses
Another ideal investment in your future is the start of a new business that is your own. If and when the business succeeds, it helps improve your income and net worth, which is why it is considered a good debt to take a loan out to start your own business.
A new business comes with a number of expenses from equipment, office supplies, and raw materials to taxes, certification, and accreditation fees. Not to mention employee salaries, rent, amenities, and so much more!
But if you are able to follow a sensible budget and build a successful budget, you can repay the loan back in a short amount of time. A business can be the most lucrative asset you have!
Mortgage Loans and Real Estate Investments
The purchase of a home or other property is one of the best investments you can ever make because they retain or increase in value over time. Along with having an appreciating asset on your hands, you also have a place to live or work!
This is why it is considered a good debt to take out a loan to buy a house or do improvements on it. Mortgages are typically long-term and come with lower, tax-deductible interest rates. In the meantime, you can begin generating an income through your real estate by renting it or adding other income sources like turning into a laundromat, etc. You can also sell it for a higher price later on.
Mortgages, like student loans, can turn into bad debt if you neglect them or do not pay them back when you are supposed to. In addition, it can also become bad debt if your properties aren’t taken care of, thereby diminishing in value.