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Good Debt vs. Bad Debt



I know that this is a bit of a controversial topic because some people will argue that there is no such thing as good debt. However, I think that there is a clear distinction between the two. An obvious example of bad debt would be credit card debt. The main reason behind it is because you are usually drowning in interest. In many cases people are paying in the range of 20% in interest fees on their credit cards. To calculate that simply, if someone has $10,000 in credit card debt that means the bank has you on the hook for $2,000 a year. And the interest accruals only increase if the payments don’t outweigh the interest accruals. This can very quickly create a mess.

 

Now let’s move on to a good form of debt. Usually when someone purchases a home and takes on a mortgage that is good debt. Yes, home values and recent interest rates are very high and it is making loans a lot more expensive. However, buying a home will always be a good move if you plan on living in the house long term. The reason behind that is because the principal balance on your loan will progressively decrease at a more rapid pace as the years go on and historically the real estate market only increases with time. The real estate market is just like the stock market. It has recovered and built tremendous gains from every crash in history.

 

Deciding to take on a loan will always be a case by case basis depending on your current financial situation. For some, it may not make sense for you to buy a house. It may make more sense for you to invest your money and try to build wealth by other means until you reach a level where you are most comfortable taking on a mortgage or any other substantial loan. Or, keep it even simpler and try to tighter your belt and save as much money as possible until you have enough stability to take on a large loan.

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