Good Debt vs. Bad Debt: Here's How to Know the Difference

Updated 05/06/19

When it comes to your finances, do you take a head-on approach or a head-in-the-sand approach? If you identify with the latter, the good news is that you’re not alone. The bad news? You’re not alone. Data suggests that when it comes to managing money, women are not as independent as you'd expect. In fact, 91% of women in couples are not participating in financial decisions. But we want to change that. Enter The Paper Files, where we uncover tricks and tips that will help you manage your money and your future. Ready to tackle it? Read on.

good debt vs. bad debt
@sorayabakhtiar

As I’ve mentioned before, I’m not very good with numbers (hence why I’m a writer), but I like to think I’m fairly good with money… and my spending habits, for that matter. But when it comes to good debt vs. bad debt, I realized I have kind of a lot to learn. To be completely upfront, I never really imagined it was possible for debt to be “good,” but it can be if it actually yields positive outcomes in the future.

To educate myself further, I looked to some experts for advice and figured it was well worth sharing. “In terms of educating my clients about good versus bad debt, one thing I tell them is that good debt is deductible on your tax return,” says Shawn Tydlaska, CFP, founder and CEO of Ballast Point Financial Planning. “For example, student loan interest and mortgage debt are two types of good debt.”

The thing is, debt is not one size fits all. Every person handles debt in a different way, so the amount of debt you may be comfortable with can be vastly different from what others are comfortable with. Keep reading to learn about the good debt vs. bad debt conundrum.

GOOD DEBT

A Home Mortage

Yes, applying for a mortgage for your house can seem overwhelming, but in the long run, it can be a sound investment. I have friends who are actually paying less on their mortgage monthly than what they once trew away on their NYC rentals. The thing about mortgages is that real estate costs typically rise over time. This means that when you pay your home off in say 30 years, you could make as much as two to three times the price if you chose to sell it.

Student Loans

Continuing education or technical school tuition almost always pays off in the long run. This is because educated workers tend to earn more money in the careers they have after achieving these degrees. An instance in which this may not be the case? Getting your MBA in an industry that does not give salary bumps for achieving a higher degree. Make sure you do your homework first.

Startup Costs

This refers to anything required to build something successful up—it can be initial costs for a new company or even business attire for your new job. Although you’re putting money up front, in the long run, you needed to spend that cash to start earning money. Now remember, this doesn’t mean you should purchase the most expensive desk (or shoes, for that matter). Be practical and this debt can be worth your while.

how to pay off debt
@brooketestoni

BAD DEBT

A Car Loan

I always remember my father telling me that your car depreciates the minute you drive it off the lot. And it’s true. The fact of the matter is that you likely need a car to live your life. But your best bet is to invest in a car you can afford without going over budget (and without taking out a hefty loan).

Credit Card Debt

Credit cards can be a dangerous thing if you don’t use them wisely. Interest rates are extremely high, and you’ll end up getting yourself in a ton of trouble if you can’t pay off your credit card in full. If you have a hard time sticking to a budget, stick to taking a set amount of cash out each month so you physically see what you’re spending. Or try using a debit card with a fixed amount of money rather than a credit card with a high credit limit so you learn to budget wisely.

Cash Advance Loans

Cash advance loans (aka payday loans) are considered one of the worst types of loans across the board. This is mostly because you pay a fee for a loan for a short period of time, but if you can’t pay it back on time, you’re going to be slammed with fees galore. And it doesn’t really matter if you didn’t borrow too much money to begin with. “If you have a valid, binding, legal agreement to pay that debt, and you’re in a state where they can sue you and attach your wages, you’re playing a game of chicken that you’re going to lose,” says Bruce McClary of the National Foundation for Credit Counseling.

Now that you know all about good debt vs. bad debt, you may start thinking about loans and debt in a completely different way. And when in doubt, do your research.

Related Stories