Ever found it so painfully ironic that you need job experience to get a job? Well, debt can be the same. You need to have debt to make debt. But, let’s have a look at good debt vs bad debt.
Good debt is a great example of “It takes money to make money”. Good debt assists you in generating income and increases your net worth. Examples of good debt include:
- Small Business Ownership
- Real Estate
Bad debt can be determined by answering the following question; “is this going to go up in value or generate an income?’
Examples of bad debt include:
- Clothing accounts and consumables.
- Credit cards
While some debts are necessary and have higher reward than risk, some risks just aren’t even worth taking. Some necessary debt most people make that fall under ‘bad debt’ is a car. The value decreases with every kilometer yet it is something that has a high reward. Public transport expenses work out more than having to pay for your own petrol and you have an asset. Bonus.
Even the best of debts still has its risks. Investments can quickly go sour and you have the risk of losing all the money you invested.
The important questions you need to ask yourself before taking on more debt is ;
Do I really need this?
Can I genuinely afford this?
Is the reward higher than the risk?
Is the interest rate reasonable?
Is this the best price I could’ve gotten?
Should I get a second opinion?