Good Debt vs Bad Debt
Hello All,
(Prefer to watch instead? Check out my related video, Why Not All Debt Is Bad)
A young colleague of mine recently purchased a house. His mortgage payments are going to be less than the rent he is currently paying and he will now own an asset that will likely increase in value over time. However, despite these clear positives, he is feeling a psychological burden that is impacting his financial decisions.
I think this is something that many of us can relate to - the feeling of being in debt. But it is important to remember that this isn't entirely rational. Debt can actually be a force for good and improve our financial position if used well. It is therefore essential to distinguish between good debt and bad debt.
What Is Good Debt?
Good debt helps you build assets, increase income, or create long-term value. It’s an investment, not just an expense.
Examples:
A business loan used to buy equipment that increases your capacity or allows you to serve more clients.
A student or professional development loan that helps you upgrade your skills and attract higher-paying work.
A mortgage on a property that grows in value or generates rental income.
A line of credit used to smooth short-term cash flow while waiting for client payments.
Each of these examples helps you grow your net worth or improve your earning potential over time.
What Is Bad Debt?
Bad debt, conversely, usually relates to items that lose value quickly or don’t generate income. It often comes with high interest rates and offers no real return.
Examples:
Credit card balances used for everyday expenses or impulse purchases that aren’t paid off monthly.
Car loans for vehicles beyond what your business or lifestyle realistically requires. It should be noted that cars, while an asset, lose value almost immediately upon purchase.
Buy-now-pay-later purchases that seem small individually but add up over time.
These types of debt reduce financial flexibility, limit future options, and make it harder to invest in opportunities that drive growth.
A Simple Rule of Thumb
Before taking on any new debt, ask yourself:
Will this debt help me earn more, build an asset, or create lasting value?
If the answer is yes, and you have a realistic plan to repay it, it’s likely good debt. If not, it may be a sign to wait or reconsider.
Debt is a tool.
Debt isn’t inherently good or bad. Rather it’s about how you use it. Managed wisely, it can help you invest in your future, add to your net worth, and grow your business. Used impulsively, it can have a material effect on your finances and make it harder to access good debt later.
I'd love to hear your thoughts on how you approach debt and how it has influenced your buying decisions. Simply reply to this email.
Ronika
P.S. Check out my updated blog article on 7 reasons why debt is good for your business.
