Debt can sound like a horrible and shameful thing, but most of us can’t live entirely debt free. Well-known author and the don of personal finance, Robert Kiyosaki, agrees that there is such a thing as good debt. What sets good debt apart from bad debt are the positives and negatives that come from it.
What is good debt?
Any debt that will have a positive impact on your life is good. This includes buying something that grows in value over time, like a house, or buying something with future value (go look that up, it’s important).
A great example of good debt is taking out a student loan. You’re borrowing money to finance your studies, and therefore your future greatness. Education is an investment that can make you more valuable in your chosen career and give you more earning power. And who doesn’t want that?
Good debt is usually secured debt backed up by an asset. The banks will have specific rules about how you can use the money you borrow, and they offer great interest rates on good debt.
What is bad debt?
Borrowed money used to buy unnecessary luxury items is usually called bad debt – like using your credit card to buy those new Nikes. Or buying a fancy car when an average one will do. These non-essentials have no future financial value. In fact, they lose value the second you buy them. They’re fun, but not wise.
Using credit for something you could’ve saved for is usually seen as bad and unnecessary debt. Yes, we all love cool sneakers, but saving for a couple of months to buy them is the wiser choice.
Banks also charge higher interest rates on this kind of debt, so you’ll end up paying more for your purchase than it’s actually worth. Which is really not worth it.