What is Good Debt?
For our Calgary, Edmonton, and rural Alberta clients, hearing the word “debt,” can cause recoil and our stress levels to rise. Most of us are taught from a young age that debt is bad and that paying off your debt is the ultimate goal in life, if we were taught anything at all about debt. More often than naught, discussions around money, investing and debt management are not common discussions around the supper table.
But what if your debt were helping you earn money? What if taking on a certain amount of debt could be a good thing?
When people think about getting out of debt, they often lump everything together. But not all debts have the same purpose. It’s important to understand the differences between good and bad debt so you can get the most out of your financial situation.
Good Debt: The Basics
Basically, good debt is anything that helps you make money, improve your earning potential in the future or help create wealth over time. Good debt has lower interest rates and may have longer repayment terms such as a mortgage or student loan. The key to good debt is making sure it will help you earn more money than it costs you to pay it back.
Here are some examples:
Getting an education offers huge returns in terms of personal growth and job opportunities. If you don’t have the capacity to pay for school upfront, student loans can help you get an education now and pay for it later when you’ve entered the workforce and start earning an income. Careful monitoring of the amount of student loans is important to ensure that the amount borrowed does not cause future difficulties at the time repayment is required.
It is a personal decision whether or not to rent or buy a home. There are equal arguments for and against home ownership. Each mortgage payment buys a bit more equity in the property and eventually you will own the property outright. Historically, the home rises in value over time and can create additional wealth to you.
Investing in the growth of your business by borrowing money to invest in that business can be considered good debt if that growth is realizable. Of course, there are some businesses that do not succeed and careful examination of your business and marketing plan is important before borrowing. In addition, for many owner operated businesses the lender will require a personal guaranty from the owners which may impact the owner’s capacity to borrow for their own personal purposes and may attract personal liability if the business does not succeed.
Why Good Debt Is Important
Good debt is a key component of an individual’s credit history, allowing them to build a strong credit score. A strong credit score can be beneficial for personal and professional growth; it allows you access to loans at better interest rates, which will save you money over time.
Examples of bad debt
There are many examples of bad debt. Among them are:
Pay-day loans: Pay-day loans have high interest rates that can make them unaffordable. Individuals who have sought out our services in the past found themselves in the endless cycle of getting pay-day loans that they never seem to be able to repay in full or to get out of over the long term.
High interest bearing credit cards: Having a credit card in today’s society is a bit of a necessity. Where people get into financial trouble is when they have multiple cards all of which have open balances on them that again never get paid down.
Consolidation loans and high interest bearing loans: Consolidating your debt into one consolidation loan may be a good type of debt if, the debt that you were consolidating is closed and no longer available to you and if you change your spending habits that got you over extended in the first place. If you still have access to the debt that was consolidated and you do not change your spending habits, you will once again charge these debts up and now have those debts plus the consolidation loan.
About JW Weber & Associates
If you are searching for Calgary bankruptcy trustees, be sure to ask what your options are. Bankruptcy is just one possibility. Consumer proposals are not the same as bankruptcy and may be a better option. Be sure to ask about your choices when speaking to a Licensed Insolvency Trustee.